Shipping is completely different from “shipping and handling” in a sales tax audit. In one situation, as long as you use a third-party carrier and separate it as a different line item, it is a nontaxable component of the bill. However, the word handling brings everything into the bundle of a taxable item.
Watch this video explanation:
https://youtu.be/3KGCH0g3ghw
Transcript
The word handling can change an entire sales tax audit. I’m Mansoor Ansari with Nexus Tax Defense.
If you’re selling merchandise and using a third-party carrier for the shipping, then you’re almost halfway there in terms of not having to charge sales tax on the actual cost of the shipping. Shipping still needs to be its own line item.
However:
- If you upcharge your customer on the cost of shipping
- Or add the word handling
Then the entire shipping cost is subject to sales tax.
Summary: How to Avoid Sales Tax on Delivery Charges
If you do not want to expose yourself to sales tax on delivery charges, then follow these steps:
- Use a third-party shipping company.
- Do not upcharge on the shipping cost.
- Do not add the words “handling fee” on your invoice.
Frequently Asked Questions
What is the difference between “shipping” and “shipping and handling” for sales tax purposes?
Shipping, when done through a third-party carrier and listed as a separate line item on the invoice, is typically not subject to sales tax. However, adding “handling” to the description can make the entire charge taxable.
Is it okay to charge more than the actual shipping cost?
No. Upcharging for shipping can trigger sales tax liability on the full delivery charge, even if you use a third-party carrier.
Why does the term “handling” make the shipping charge taxable?
The term “handling” implies labor or packaging services beyond simple delivery. This often bundles the charge into a taxable part of the transaction.
Can I avoid sales tax on delivery charges?
Yes. To avoid sales tax, use a third-party shipping provider, do not mark up shipping costs, and avoid including the word “handling” anywhere on the invoice.
Do I need to show shipping as a separate line on the invoice?
Absolutely. Listing shipping separately from the product price is critical to preserve its non-taxable status in most jurisdictions.