Understanding Key Terms
Before we begin, let’s define the terms “common carrier” and “gross receipt.”
- Common Carrier: A commonly accepted method of shipping, such as UPS, USPS, and DHL.
- Gross Receipt: The total of the merchandise, shipping, and any other costs listed on the final bill.
Shipping by Common Carrier
If you ship packages by way of a common carrier, your gross receipt is not taxable as long as you segregate the cost of shipping from the merchandise.
If your company delivers the goods itself, then the gross receipt will be taxable.
Shipping Tax Exempt Purchases
Exemptions for Certain Industries
If you are selling things related to farming (which are sales tax exempt) or building ships, trains, or aircraft, your goods may be tax exempt.
Exempt Entities
If you sell tax-exempt goods or your sales are to an entity exempt from tax (including local governments and charities), any shipping and handling charges to your customer may also be tax exempt.
This does not require the segregation of shipping charges.
Importance of Segregating Charges
Again, shipping costs must be segregated on the final bill.
You will hear television infomercials telling you there is one charge for shipping and handling. However, as a seller:
- Shipping and handling must be itemized separately on the final bill.
- If you add a handling charge to your orders, you should bill for it separately and charge sales tax on that amount.
- When passing off freight charges for items shipped to you for your customers, you must add sales tax to the cost of the freight charge that you are passing off.
Frequently Asked Questions
What is considered a common carrier for shipping purposes?
A common carrier includes widely recognized delivery services such as UPS, USPS, and DHL. These are standard third-party shipping providers not affiliated with the seller.
When is shipping tax-exempt in a sales transaction?
Shipping is tax-exempt when using a common carrier and the shipping charges are separately stated from the merchandise on the bill. If the seller delivers the goods directly, shipping becomes taxable.
Are handling charges always taxable?
Yes. If you charge a separate handling fee in addition to shipping, that amount is generally taxable and should be itemized accordingly on the invoice.
Do I need to separate shipping costs on tax-exempt sales?
No. If the sale itself is tax-exempt, such as to a government agency or a nonprofit, shipping and handling charges are also exempt and do not need to be segregated on the bill.
Why is itemizing shipping and handling charges important?
Itemizing charges ensures compliance with sales tax regulations. Without segregation, shipping could be included in the gross receipt total and thus become taxable, even if it shouldn’t be.