Do You Pay Sales Tax on Shipping and Handling?
Navigate the complexities of sales tax on shipping and handling. Learn how state laws and specific situations affect taxability.
Understanding whether sales tax applies to shipping and handling charges is a frequent question for both businesses and consumers. The answer is not straightforward, depending on state tax laws. The decentralized nature of sales tax administration in the United States leads to significant variations in how these charges are treated across different jurisdictions.
Understanding the General Principles
Sales tax is primarily a state-level tax, with each state developing its own statutes and regulations. This state-centric approach is the fundamental reason for varying rules concerning shipping and handling charges. Businesses operating across state lines must navigate different requirements.
Taxability often hinges on the item being shipped. Sales tax generally applies to the retail sale of tangible personal property (physical goods). Services are typically exempt unless specifically enumerated as taxable by state law. If the underlying product is subject to sales tax, the associated shipping and handling might also be.
“Shipping” encompasses costs for transporting goods from the seller to the buyer, such as postage or common carrier fees. “Handling” refers to charges for preparing the item for shipment, including packaging, labor, and processing. Some states differentiate between these components, taxing one but not the other, while many states consider them together.
Sales tax nexus describes the connection a seller must have with a state to require sales tax collection. Nexus can be established through physical presence, like having a store or employees, or through economic activity, such as exceeding a sales threshold. If a seller does not have nexus in a state, they are generally not obligated to collect sales tax, including on shipping and handling, from buyers in that state.
State-by-State Taxation Approaches
States adopt several approaches to taxing shipping and handling. These varying rules underscore the importance of understanding specific regulations in each jurisdiction where sales occur.
One common approach taxes shipping and handling only if the product is taxable. If the item is subject to sales tax, the shipping and handling charges become part of the taxable sales price. If the product is exempt, such as food or medicines, associated shipping and handling charges are also typically exempt. Examples include Arkansas, Connecticut, Georgia, Indiana, Kentucky, Minnesota, Mississippi, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, and Wisconsin.
Some states always subject shipping and handling charges to sales tax, regardless of the product’s taxability. Hawaii is an example, where its General Excise Tax (GET) includes delivery charges in gross receipts, making them generally taxable.
Some states do not tax shipping and handling charges. The five states without a statewide sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not levy sales tax on shipping at the state level. However, local sales taxes may still apply in some of these states, such as Alaska.
A fourth approach depends on how shipping and handling charges appear on the invoice. Shipping charges may not be taxable if separately itemized from the product price. If “bundled” or included in the overall price, they become taxable. States like Alabama, Arizona, California, Colorado, Florida, Idaho, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, Oklahoma, Utah, Virginia, and Wyoming often follow this rule.
Some states distinguish between shipping and handling. For instance, in Virginia, separately stated shipping charges are generally exempt, but handling charges are always taxable. If shipping and handling are combined into a single charge, the entire amount may become taxable.
Specific Scenarios and Exemptions
Sales tax application to shipping and handling extends to various scenarios. When shipping goods subject to sales tax, like electronics or clothing, taxability of shipping and handling charges follows the destination state’s rules. For example, in states where shipping is taxable if the item is taxable, the delivery fee for a taxable electronic device would also be taxed.
When shipping non-taxable items, associated shipping and handling charges are generally exempt from sales tax. For example, if a customer orders groceries, the shipping fee would typically be exempt. However, this rule does not apply in states where shipping and handling charges are always taxable, regardless of the product’s tax status.
Orders combining taxable and non-taxable items may require prorating shipping charges. Sales tax applies only to the portion related to taxable items. For instance, if an order contains 60% taxable goods by value, 60% of the shipping and handling charge would be subject to sales tax. If no proportional allocation is provided, the entire shipping and handling charge for a mixed order might become taxable.
For out-of-state sales, a seller’s sales tax nexus determines the collection obligation. A seller generally collects sales tax, including on shipping and handling, only where nexus is established. If a business ships goods to a state where it does not have nexus, it typically does not collect sales tax, and the buyer may be responsible for paying use tax directly to their state.
Goods purchased for resale are typically exempt from sales tax, provided a valid resale certificate is furnished. This exemption extends to shipping and handling charges for those goods, as they are considered part of the inventory cost.