Understanding Shipping Sales Tax
If you sell products online, you’ll end up charging customers for delivery or shipping fees at some point. This can be tricky since laws regarding shipping tax vary between US states and depend on delivery methods.
Charges to deliver electronic goods differ from those delivered by vehicle. Alternatively, combined costs for shipping may vary from separate charges. The intricacy of shipping tax can quickly add up.
Here, we’ll outline how shipping tax works and how you can ensure you’re compliant with each state’s regulations.
Shipping Tax Laws by State
Your first step is to look at each state’s guidelines on taxation. Generally, if you type into your search engine: “[STATE] shipping tax,” the appropriate documentation comes up. Double-check that the information comes from a .gov or other verified sites.
Forty-five US states and Washington DC have a sales tax, but each state can set its regulations. This is why it’s so critical that you check on a case-by-case basis. For reference, here are the shipping laws of a few different US states:
Arizona: Combined shipping and handling charges are usually taxable, but most shipping charges are exempt. Electronic delivery charges are often exempt, though you’ll need to check local tax laws in certain parts of Arizona.
California: If the sale is exempt, shipping charges are usually exempt. Conversely, if the sale is taxable, so are shipping charges. When shipping charges exceed what it costs to deliver, that tends to be taxable. For more intricacies, check out California’s site.
Florida: Transportation charges on taxable sales are generally taxed. If the buyer can pick up the item or arrange their transportation services, taxation is typically waived. Electronic delivery is also generally exempt.
New York: If the sale is taxable, so are shipping, handling, and delivery charges. That said, if a customer arranges for third-party delivery and pays them directly, taxation is exempt. Non-taxable sales mean shipping, handling, and delivery charges are usually exempt. For more details, visit New York’s site.
Notice how widely these vary. This is why you must always check with a state site to see their policies.
It’s worth noting that most of these taxation laws were created before eCommerce rose into prominence. Luckily, most states updated their guidelines to account for eCommerce, another reason why it’s essential to check the state’s official site.
When is Shipping Taxable?
When a buyer in one of your nexus states purchases from you, and if that state mandates that the shipping charges can be taxed, you’ll need to charge shipping tax.
A sales tax nexus refers to a situation where your business is in some way connected to a state. Although this definition varies a bit between states, it generally means your business bears some physical presence or economic tie to that state. This can include:
Owning a warehouse in that state
Having an office or other location in that state
Storing inventory in that state
Having an employee, contractor, or someone else in that state
Again, in this case, you will be required to collect sales tax on shipping from buyers in that nexus state, depending on its regulations.
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Related: Hacks For Saving On Shipping Costs
To see states where there’s a tax on shipping, check out TaxJar’s diagram:
Shipping Sales Tax Exceptions
To reiterate, always read a state’s guidelines, as many of them have exceptions. It’s up to you, the seller, to read up on these. Here are a few examples:
Customer pickup. Many states insist on taxing eCommerce shipping because delivery is a necessary part of the process. That said, if you give customers the option to pick up their item, states then often consider shipping charges exempt from taxes. This can be independent of how far your pickup location is from the customer and applies even if you give your buyer the option, whether they choose it or not.
Taxable and non-taxable items. In some states, items like food and medication are tax-exempt. If you ship these items with taxable ones, some states only require you charge taxes on the taxable items. You can divide the items' weight or their prices and decide which are responsible for what portion of taxes.
Using your own vehicle. Shipping tax laws typically refer to “common carriers,” including FedEx, UPS, or USPS. If you deliver items on your own without going through these carriers, some states exempt shipping sales tax.
Customers don’t want to pay shipping tax, so it’s essential to look for these exceptions to save them the charge. This further emphasizes the importance of reading each state’s guidelines carefully.
Related: Why Offer Free Shipping?
Shipping Tax 101: Rules of Thumb
That was a lot of information! Don’t worry, here are the general rules to follow:
Taxable contents = taxable shipping charges
Contents exempt from taxation = shipping charges exempt from taxation
When shipping taxable and non-taxable items together, the portion of the shipment's taxable sale is charged shipping tax, where the tax-exempt part is exempt from shipping tax.
To get any more granular than that, refer back to each state’s guidelines.
Shipping tax can be frustrating for customers and confusing for shippers. Remember the general rules of thumb and keep a record of taxation laws by state. When in doubt, refer to each state’s guidelines to ensure shipping goes smoothly.
Reach out to the team here at Parcll Delivery for your high-volume shipping needs. We have competitive prices, excellent package tracking, and fast transit rates, making us the leading B2C cross-border shipping carrier from the U.S. to Europe.
- By Vanessa Tran
- Apr 01, 2021
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