Is Freight Taxable in Arizona? A TPT Analysis
Demystify Arizona's TPT for freight charges. Understand the specific circumstances that dictate their taxability under state law.
Freight charges often raise questions about their taxability. Arizona imposes a Transaction Privilege Tax (TPT), a tax on the seller for the privilege of doing business in the state, rather than a direct sales tax on the buyer. The taxability of freight charges under Arizona’s TPT depends on the specific circumstances of the transaction.
When Freight Charges Are Included in the Taxable Amount
Freight or delivery charges are included in the seller’s gross receipts subject to Arizona’s Transaction Privilege Tax when they are part of the sale of taxable tangible personal property. This applies even if the freight charge is separately stated on the invoice, as the Arizona Department of Revenue (ADOR) views such charges as part of the total selling price. For example, if a furniture store uses its own truck to deliver purchased furniture, the delivery fee is taxable. Similarly, if an online retailer collects a shipping charge from the buyer, even if a third-party carrier performs the actual shipping, that charge is subject to TPT.
This rule applies under the Retail Classification as outlined in A.R.S. § 42-5061, which defines the retail classification as selling tangible personal property at retail. The tax base is the gross proceeds of sales or gross income. When the seller is responsible for arranging and billing the freight, these charges are considered integral to the retail sale. Even if an invoice itemizes “shipping and handling,” if the “handling” component includes activities like selecting or packaging the order, the entire charge may be taxable.
When Freight Charges Are Not Included or Are Exempt
Freight charges are not taxable if they are separately stated on the invoice and paid directly by the buyer to a common carrier or a third-party transportation company. This applies when the buyer directly contracts with and pays the shipping company, as the seller is not considered to be profiting from the shipping, and the charge is viewed as distinct from the sale of the goods.
If the tangible personal property being sold is exempt from TPT, the freight charges for those items are not taxable. Examples include certain food items for home consumption, qualifying manufacturing equipment, or sales for resale, where the buyer provides an exemption certificate. Freight or delivery charges related to services, where no tangible personal property is sold, are not subject to TPT.
Freight related to sales where goods are shipped directly to an out-of-state location may be exempt from Arizona TPT under interstate commerce rules. A.R.S. § 42-5061 allows a deduction for sales in interstate or foreign commerce. For such sales to be exempt, the order must be received from outside Arizona, and the retailer must ship or deliver the tangible personal property to a location outside Arizona for use outside Arizona. Merely stating freight charges separately on an invoice is not sufficient for an exemption; the nature of the delivery service provider and the underlying transaction are important.