Do You Charge Sales Tax on Mileage?

Determining whether to apply sales tax to mileage charges is a common challenge for businesses, as the correct tax treatment involves multiple factors. This complexity can lead to unintentional non-compliance, resulting in potential assessments for unpaid tax, penalties, and interest. The core of the issue lies in whether the mileage charge is considered part of the overall transaction or a separate service.

Determining if Mileage is Part of a Taxable Sale

The taxability of a mileage charge hinges on its connection to the primary item or service being sold. If the mileage, characterized as a delivery or transportation fee, is a necessary component of completing the sale of a taxable good or service, it is considered part of the total sales price. This concept is referred to as a “bundled transaction,” where the travel expense is inseparable from the main purchase.

Consider a furniture store that sells a taxable sofa and charges a fee to deliver it. The delivery is required to fulfill the sale, making the mileage charge part of the taxable transaction. Conversely, if a consultant provides a professional service that is not subject to sales tax, any mileage charge billed to the client for travel would also be non-taxable, as it follows the same tax treatment.

This analysis involves determining the “true object” of the transaction. A customer buying a sofa desires the sofa itself, and the delivery is the method of obtaining it, making the sofa the true object and all mandatory charges taxable. If a business charges for mileage related to the sale of both taxable and non-taxable items in one transaction, the charge may need to be allocated based on rules set by the jurisdiction.

If the travel or delivery is required by the seller to complete the transaction, it is included in the taxable base. The income a business receives from mileage must be included in the gross proceeds of sales when connected to taxable services or property. This principle holds even if the charge is intended only to recover operational costs.

The Impact of Invoicing and Service Agreements

How a business documents a mileage charge on an invoice or in a contract can influence its taxability. A common practice is to separately state the mileage or transportation fee as a distinct line item on the bill. However, listing the charge separately does not guarantee it will be exempt from sales tax, as the effectiveness of this strategy depends on the rules of the taxing jurisdiction.

Service agreements and contracts play a role in defining the nature of the charge. If a contract stipulates that delivery is optional and the customer could pick up the goods themselves, the separately stated delivery charge may be non-taxable. In this scenario, the customer is contracting for two separate items: the product and an optional delivery service.

The presentation on an invoice provides a signal of intent. An invoice with a single line item for “Custom Cabinet with Delivery: $5,500” suggests a bundled transaction. In contrast, an invoice with two lines, “Custom Cabinet: $5,000” and “Optional Delivery Fee: $500,” presents the delivery as a separate service. Some tax authorities will not tax a separately stated delivery charge if conditions are met, such as using a common carrier and charging no more than the actual cost of shipping.

Businesses must maintain clear records to substantiate the nature of these charges. If an invoice shows a combined charge for “shipping and handling,” the handling portion is considered a taxable service charge, while the shipping portion’s taxability depends on other factors. Without records showing the actual cost of delivery, auditors may deem the entire charge taxable.

State-Specific Sales Tax Rules on Transportation

Sales tax is administered at the state level, leading to significant variation in the rules applied to transportation, delivery, and mileage charges. Because there is no single federal sales tax, businesses must navigate the regulations of the specific state where a transaction occurs. These rules can be grouped into a few common approaches states take.

One group of states considers all delivery and transportation charges connected to the sale of taxable goods to be part of the sales price and therefore taxable. In these jurisdictions, it does not matter if the charge is separately stated on the invoice or if the delivery is made by the seller’s vehicle or a third-party carrier.

A second common approach allows for an exemption for separately stated delivery charges. This approach often comes with specific conditions, such as the requirement that the charge must not exceed the actual cost of the delivery. Another condition may be that the delivery must be made by a common or contract carrier.

A third category of states has more complex rules, which may depend on factors like when the legal title to the goods passes from the seller to the buyer. For example, if title transfers at the seller’s location before shipping begins, the subsequent shipping charge may be a non-taxable service. To find specific rules, business owners should consult their state’s Department of Revenue or equivalent tax agency for guidance on “transportation charges” or “delivery fees.”

Distinguishing Sales Tax from Income Tax on Mileage

It is important to differentiate between the sales tax a business collects from a customer and the income tax it pays on earnings. The rules for bundled transactions and invoicing apply specifically to sales tax, which is a consumption tax paid by the customer and collected by the business for the state.

Income tax is a tax on the net profits of a business or an individual’s earnings. If a business bills a client for mileage, that charge becomes part of its gross revenue for income tax purposes, and the business can then deduct its actual vehicle expenses or use the standard IRS mileage rate to reduce its taxable income. For employees, the IRS standard mileage rate allows employers to provide non-taxable reimbursements for using a personal vehicle for business. However, the deduction for unreimbursed employee travel expenses has been suspended through 2025, meaning employees cannot deduct business mileage their employer does not reimburse. The question of whether to charge a customer sales tax on that mileage fee is a separate issue, governed entirely by state and local sales tax law, not federal income tax regulations.