Is Freight Taxable in California? A Business Tax Guide

California’s approach to sales tax on freight charges presents a complex landscape for businesses. While the sale of tangible personal property is generally subject to sales tax, the taxability of associated shipping and delivery fees is not always straightforward. This often depends on how these charges are structured, the method of delivery, and the nature of the transaction. Understanding these rules is important for businesses to ensure compliance and avoid potential penalties. This guide aims to clarify these complexities for a general audience.

Freight Charges and California Sales Tax Basics

“Freight charges” in California sales tax encompass costs related to transporting goods, including shipping, handling, delivery, and postage. Sales tax generally applies to these charges when they are part of a taxable sale of tangible personal property. The California Sales and Use Tax Law, found in Revenue and Taxation Code Section 6001, governs sales and use tax. This law establishes that sales tax is imposed on retailers for selling tangible personal property at retail within the state. A use tax is imposed on the storage, use, or consumption of tangible personal property if sales tax was not collected by the seller.

When Freight Charges Are Taxable

Freight charges become taxable in California under several conditions.

Seller’s Own Vehicle

If a seller uses their own vehicle to deliver goods, the delivery charges are taxable, even if separately stated on the invoice. This applies because the seller retains control and responsibility for the goods until they reach the buyer.

Combined Charges

When freight charges are not itemized separately and are simply included in the selling price of the taxable goods, the entire amount becomes subject to sales tax. Combining shipping costs with handling charges into a single “shipping and handling” line item also renders the entire charge taxable. Even if the shipping portion might otherwise be exempt, including handling makes the combined amount taxable.

F.O.B. Destination Contracts

For sales structured as “F.O.B. destination” contracts, where the seller retains title and risk of loss until the goods arrive at the buyer’s location, the delivery charges are taxable. This is because transportation is considered part of the seller’s cost of making the sale, rather than a separate service to the buyer.

Handling Charges

Charges for handling, packing, or preparing goods for shipment are taxable in California, even if separately stated. This is because handling is viewed as a service provided by the seller, making it part of the taxable gross receipts from the sale of tangible personal property.

When Freight Charges Are Not Taxable

There are specific scenarios where freight charges are not subject to sales tax in California.

Independent Common Carrier

If freight charges are separately stated on the invoice and the goods are delivered by an independent common carrier, such as the U.S. Postal Service, FedEx, or UPS, these charges are not taxable. This exemption applies only if the carrier is independent of the seller and the charge does not exceed the actual cost of delivery. The invoice must clearly list terms like “shipping,” “delivery,” “freight,” or “postage” to qualify for this non-taxable treatment.

F.O.B. Shipping Point Contracts

For sales structured as “F.O.B. shipping point” contracts, where title and risk of loss transfer to the buyer at the shipping point, the freight charges paid by the buyer are not taxable. In this arrangement, the buyer assumes responsibility for the goods once they leave the seller’s location, and transportation is considered a service to the buyer rather than part of the seller’s gross receipts.

Non-Taxable Goods

If the underlying sale of goods is not subject to sales tax, then any associated freight charges are also not taxable. For example, if goods are sold for resale or are certain exempt items like specific food products or medical devices, the delivery charges for these non-taxable sales would also be exempt.

Interstate Shipments

Interstate shipments, where goods are shipped directly from California to an out-of-state location, are exempt from California sales tax. Consequently, the freight charges for such shipments are also exempt, as the sale itself is considered to occur outside the state’s taxing jurisdiction.

Practical Considerations for Businesses

Accurate invoicing and meticulous documentation are important for businesses managing sales tax on freight charges.

Invoicing and Documentation

Invoices should clearly and separately state freight charges using terms such as “shipping,” “delivery,” “freight,” or “postage” to distinguish them from taxable handling fees. This clear distinction is important for qualifying for non-taxable treatment when applicable, ensuring only appropriate amounts are subject to tax. Businesses must maintain detailed records of all shipping arrangements, including proof of common carrier usage, freight invoices, and sales contracts with F.O.B. terms. These records are important to support the sales tax treatment of freight charges during potential audits by the California Department of Tax and Fee Administration (CDTFA). If records do not show the actual cost of an individual delivery, the entire delivery charge for a taxable sale may become taxable.

Interstate vs. Intrastate Shipments

Understanding the distinction between interstate and intrastate shipments is also important. Intrastate shipments, those remaining within California, are subject to sales tax rules. Interstate shipments to out-of-state locations are exempt from California sales tax, including their associated freight charges.

Drop Shipments

In drop shipment scenarios, where a seller facilitates a sale but a third-party supplier ships directly to the customer, the sales tax implications for freight can be complex. In California, the seller in a drop shipment may be considered the retailer for sales tax purposes, and the taxability of freight will follow general rules based on how the freight is handled and stated. Businesses involved in drop shipments should carefully review the specific terms of their agreements and ensure proper sales tax collection and remittance based on the ultimate destination and nature of the transaction.