How Is Shipping Taxed in California?

Sales tax in California applies to the retail sale of tangible personal property. Understanding how sales tax applies to shipping charges can be complex, as they may be subject to sales tax depending on the transaction and delivery method. California’s rules aim to determine if transportation costs are part of the taxable sale of goods.

General Rules for Shipping Charges

California law generally considers transportation charges part of the “sales price” or “gross receipts” from tangible personal property sales. This means shipping costs are, by default, included in the amount subject to sales tax. California Revenue and Taxation Code Sections 6011 and 6012 define these terms to include most costs associated with a sale, including transportation. However, specific exclusions apply.

For shipping charges to be excluded from the sales tax base, they must meet requirements outlined in Regulation 1628. These include the charges being separately stated on the invoice and reflecting the actual delivery cost. Additionally, transportation must be performed by a common carrier (e.g., U.S. Postal Service, FedEx, UPS) or an independent contract carrier. If the retailer uses their own vehicle or employees for delivery, shipping charges are generally taxable.

The amount that can be excluded cannot exceed the actual cost incurred by the retailer for transportation. If shipping charges are not separately itemized or exceed the true cost, they may become taxable.

Shipping with Taxable Sales

When taxable tangible personal property is sold, associated shipping charges can also be taxable, depending on delivery method. If the seller uses their own vehicles or personnel, delivery charges are generally included in the taxable sales price. Similarly, if a seller contracts with a private carrier but does not separately state shipping charges or charges more than the actual cost, the entire amount becomes taxable. For instance, if an invoice combines shipping and handling, the total combined amount is typically subject to sales tax.

However, shipping charges can be non-taxable even with a taxable item. This occurs if the seller ships directly to the purchaser via a common carrier or U.S. mail, and charges are separately stated on the invoice, reflecting only the actual cost. This distinction allows businesses to potentially avoid sales tax on shipping if they adhere to these specific criteria. For example, if a retailer sells a taxable electronic device and charges the customer the exact amount paid to FedEx, separately itemized, that shipping charge would not be taxed.

If a seller charges a flat rate exceeding the actual delivery cost, only the excess portion becomes taxable. For instance, if a $5.00 flat rate is charged for an item costing $3.50 to ship via common carrier, the $1.50 difference is subject to sales tax. Maintaining accurate records of actual shipping costs is important for retailers to justify non-taxable shipping charges.

Shipping with Non-Taxable Sales

When goods are not subject to sales tax, associated shipping charges are also generally exempt. This applies regardless of how charges are stated or the delivery method. The non-taxable nature of the primary item dictates its transportation costs’ tax treatment.

For example, certain food products, prescription medications, or items sold for resale are not subject to sales tax in California. If a grocery order includes non-taxable food items, the shipping fee is also non-taxable. Similarly, if a repair service is performed without transferring tangible personal property, the delivery cost of the repaired item or service is not taxed.

If an order contains both taxable and non-taxable items with a single shipping charge, its taxability is typically allocated. The shipping charge is prorated based on the taxable portion of the sale. This ensures sales tax applies only to the shipping cost attributable to taxable goods.

Common Scenarios and Exceptions

Handling charges, covering expenses like packaging or order fulfillment, are generally taxable in California when associated with taxable goods. Even if separately stated, they are considered part of the preparation for sale and fall within the taxable sales price. If shipping and handling are combined, the entire amount is typically subject to sales tax.

Terms of sale, particularly “Freight on Board” (FOB), can influence shipping taxability. If designated “FOB origin,” title and risk of loss pass to the buyer at the seller’s location. If the buyer arranges and pays for shipping directly to a carrier, those charges are generally not taxable to the seller, as transportation occurs after the sale.

In drop shipping scenarios, where a third party ships goods directly to the customer, shipping charge taxability follows the same rules. Determination depends on whether items are taxable and how charges are handled by the seller of record. Shipping charges for pure services, where no tangible personal property is transferred, are not subject to sales tax.