Is Shipping and Handling Taxable in California?

Sales tax on shipping and handling charges can be confusing for consumers and businesses. The taxability of these charges is not always straightforward, varying based on several conditions. Understanding these nuances helps ensure proper compliance and prevents unexpected costs or liabilities.

The General Rule for California Sales Tax on Delivery Charges

In California, sales tax applies to the “sales price” of tangible personal property sold at retail. The state’s base sales tax rate is 7.25%, though combined rates can reach up to 10.25% depending on local district taxes. Delivery charges, which are amounts a seller charges for preparing, packing, and transporting items, are considered part of this taxable sales price if the item itself is taxable.

If a tangible personal property sale is subject to sales tax, any associated delivery charges are also subject to sales tax, unless specific conditions for exemption are met. An exception exists when delivery is made by a common carrier, U.S. mail, or an independent contractor, and certain other conditions are satisfied. This exception allows separately stated delivery charges to be exempt. However, if a seller uses their own vehicles for delivery, the charges are taxable.

Key Factors Determining Taxability of Delivery Charges

The taxability of delivery charges in California depends on several specific conditions and how these charges are structured. A distinction exists based on who performs the delivery. When a seller delivers goods using their own vehicle, the delivery charge is taxable because the delivery is seen as an integral part of the seller’s overall sale.

Conversely, if a common carrier, such as the U.S. Postal Service (USPS), FedEx, or UPS, is used, and the delivery charge is separately stated on the invoice, it may be exempt from sales tax. To qualify for this exemption, the separately stated charge must not exceed the actual cost the seller incurred for the delivery. If the charge is greater than the actual cost, the excess portion becomes taxable.

Separately stating delivery charges on an invoice is important. If delivery charges are not clearly itemized, they are presumed to be taxable as part of the sales price. The invoice should use specific terms such as “shipping,” “delivery,” “freight,” or “postage.”

The taxability of the goods themselves also impacts delivery charges. If the goods being delivered are exempt from sales tax, for example, certain food products or prescription medications, then the delivery charges for those goods are also exempt. The taxability of the shipping charge follows the taxability of the item being shipped.

Applying the Rules to Specific Situations

When an order includes both taxable and non-taxable items, the delivery charge should be allocated proportionally. For instance, the delivery charge can be prorated based on the sales prices of the taxable property compared to the total sales prices of all property in the shipment.

Handling charges are treated differently from pure transportation costs. Charges for “handling,” which include activities like packaging, processing, and boxing, are considered part of the sales price of tangible personal property. Handling fees are taxable if related to a taxable sale, regardless of how they are stated on the invoice. If “shipping and handling” are combined into a single charge, the entire amount becomes taxable.

In drop shipping scenarios within California, sales tax rules can be complex. If a California-based drop shipper delivers tangible personal property on behalf of an out-of-state retailer to a California consumer, the drop shipper may be responsible for collecting and reporting sales tax. This applies if the out-of-state retailer does not hold a California seller’s permit. In such cases, the drop shipper may calculate the retail selling price as their selling price to the true retailer plus a 10% markup for sales tax purposes.

When services are provided and tangible goods are shipped as an incidental part of that service, the taxability of the delivery charge depends on whether the service is taxable. If the service is non-taxable, and the goods are merely incidental to that service, the delivery charges for those goods may also be non-taxable.

Compliance and Documentation for Businesses

Businesses must issue clear and accurate invoices that properly itemize delivery and handling charges. Using specific terms like “shipping,” “delivery,” or “freight” for non-taxable transportation costs, and “handling” for taxable charges, helps distinguish them for sales tax purposes. This clarity aids customers and tax authorities in understanding the taxability status of each charge.

Maintaining comprehensive records is important for businesses to substantiate their sales tax collection practices. Acceptable documentation includes bills of lading, freight invoices, express receipts, parcel post records, and sales invoices that detail transportation charges and shipping instructions. Businesses should also retain delivery receipts and expense vouchers that support their delivery costs.

Businesses must correctly report collected sales tax on delivery charges on their California sales and use tax returns. If total sales include non-taxable delivery charges, businesses should take a deduction for those amounts on the “Other” deductions line of their return to avoid overpaying tax. Failure to keep records showing the actual cost of an individual delivery may result in the entire delivery charge being subject to tax if it’s connected to a taxable sale.

Consistent application of sales tax rules and thorough documentation are important for audit preparedness. The California Department of Tax and Fee Administration (CDTFA) may audit records to ensure compliance. Businesses that fail to collect and remit sales tax correctly may face penalties and interest on unpaid amounts.