Is Shipping Taxable?
With the holiday season right around the corner, it is go-time for eCommerce retailers! We have gone so far as to create pseudo-holidays for our preholiday shopping (Cyber Monday). With all the hoopla and planning around this time of year, 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 rules and regulations on how they handle shipping. Some states consider shipping taxable while others don’t. However, even within those definitions there needs to be clarification. When a state decides that shipping is taxable, it 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 shipping charge must be included in the calculation in sales tax collected.
However, when a state says that shipping is NOT taxable, it can mean a few different things. In most cases, it means that if the charge is separate from the price of the item, then no tax needs to be collected. In the same state, if you include shipping as part of the price and do not have it as a separate line item, then it must be included in the sales tax collection. This is known as the separation rule.
Along with the separation rule, states that permit untaxed shipping require that the seller only charge the consumer what the shipping cost or less. If the seller makes a profit on the shipping, then that difference is taxable. Due to this, keeping detailed records of shipping costs are necessary in the case of an audit.
Simply defining shipping as taxable or not taxable makes this topic sound like it’s kind of simple. While that may be partially true, there are complexities (sorry we got you excited) States like Illinois expect that you follow the absolute letter of the law when deciding if you should tax your shipping charges or not.
This is based on an ambiguous statement in their regulations. The statement reads; “If the seller and the buyer agree upon the transportation or delivery charges separately from the selling price of the tangible personal property that is sold, then the cost of the transportation or delivery service is not part of the “selling price”…” This statement would make you think that shipping would NOT be taxable if stated separately; the same as any other state that doesn’t consider shipping taxable.
That thought is technically incorrect, though. 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 of 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”).
Whoa. That’s a lot of information without a clear-cut answer. So goes the world of sales tax. As always, the Taxify team are here if you have any questions about sales tax on shipping. For more information on your state or any other state you are filing sales taxes in, refer to our map in our resource guide to determine how you may be affected by differing shipping rules.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.
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