The holiday season is a wonderful time of year, especially for ecommerce! One area that doesn’t always get taken into consideration is how shipping costs can affect the amount of tax being collected. Here’s what you need to know about shipping and sales tax to get your online store ready for the holidays.
Sales Tax On Shipping: Each State Is Different
Every state has its own rules and regulations on how they handle shipping. Some states consider shipping taxable, while others don’t. And even within those definitions there needs to be clarification. When a state decides that shipping is taxable it generally means just that. It doesn’t matter if the charge is included in the price of the item or if it is charged separately. The charge must be included in the calculation in sales tax collected. However, when a state says that shipping is NOT taxable, in general it means that if the charge is separate from the price of the item, then no tax is collected. If you include shipping as part of the price, then it is still taxable in these states.
Understanding How Nexus Affects Shipping Sales Tax
When determining whether shipping is taxable, we assume you are an ecommerce retailer; brick-and-mortar businesses face different challenges than ecommerce. We also assume you are using a common carrier, such as USPS, UPS, or FedEx. This assumption is based on the fact that by using a common carrier you are protected from establishing nexus by means of delivery via a company-owned vehicle and some states may have different rules for deliveries via common carrier versus company-owned vehicles.
If you have already established nexus in another state besides your own, or you are delivering via means other than a common carrier, then make sure to refer to our “Sales Tax by State” section for a state-by-state breakdown of shipping rules as well as sourcing, which can have an effect on the rates that you need to use when calculating the sales tax to be collected.
Simply defining shipping as taxable or not taxable causes this subject to sound like it has few complexities than other subjects necessary to running your business. While that may be partially true, states such as Illinois, can be dicey. Illinois expects that you follow the absolute letter of the law when deciding if you should tax your shipping charges or not. And it is all based on a ambiguous statement within their regulations that says, “If the seller and the buyer agree upon the transportation or delivery charges separately from the selling price of the tangible personal property which is sold, then the cost of the transportation or delivery service is not part of the “selling price”…” This would make it seem that shipping would NOT be taxable if stated separately; the same as any other state that doesn’t consider shipping taxable.
This is technically incorrect though because the state of Illinois does not necessarily consider shipping to be a separate agreement between buyer and seller. If you charge a flat rate to all your customers for shipping, and the price you actually pay for shipping that item is not the same, then shipping is taxable because the customer technically did not agree to the shipment option. One way to avoid this would be to offer a variety of shipping options to your customers. Once they have chosen which delivery method they prefer, then an agreement has been made between you (aka “the seller”) and your customer (aka “the buyer”).
As always, the Taxify team and platform are here to make sure you don’t make mistakes, and are covered when it comes to sales tax compliance. For more information on your state or any other state you are filing sales taxes in, refer to our “State By State Tax Rules” to determine how you may be affected by differing shipping rules.