Freight Charges

This article was originally written in August of 2007. I recently reviewed it and it still is correct!!! But I thought I'd add a few additional items.The taxability of freight or delivery charges is one of the most frequently asked questions. And the rules vary all over the place. In more than half the states, freight charges are taxable. This means that you would add the charges to the merchandise total in determining the basis for the tax calculation.

This means that, if the sale is taxable, then the freight will be taxable in those states. But if the sale is not taxable (eg. manufacturing equipment or resale), freight isn't taxable.

Here are some additional points. Remember though, that whether or not freight is taxable is only a question if the sale is taxable.

1. If the seller is actually separately showing his inbound freight (the freight the vendor pays to acquire the property), then that charge is usually included in the basis - it's taxable. For freight charges to be non-taxable, they can only be for shipments from the seller to the buyer.

2. In states where shipping charges are NOT included in the basis, there are usually restrictions. Here's a laundry list of the possible requirements. Note that these are highly variable:

• Is the freight charge separately stated? This is universal. For shipping charges to be non-taxable, they must be separately stated on the invoice.
• If the sale terms are FOB origin, then the freight isn't taxable. Does the ownership transfer at the shipping point?
• The seller can't make a profit on the delivery charge: the charge better be pretty close to what the carrier actually charged the vendor. If the seller's freight charge is more than the freight he paid, the freight charge is taxable.
• Did the seller ship via common carrier or in his own vehicle?
• Does the buyer have the option of arranging their own shipment or going and picking up the goods at the seller location?
• Was the freight charge separately agreed upon? In some states, having it be on a separate line on an order form is enough. In other states, it must be a separate physical contract. In other states, it depends on the precise wording of the agreement. If there's any restriction that is a highly gray area, this is the one.

4. Shipping charges billed directly to the buyer by a common carrier are generally not taxable (these are "collect" charges). The buyer owes no use tax on those charges.

Please remember that this is a taxing policy that is highly variable from state to state. You need to research this carefully.

Then there are those "easy" states who just say "Is the sale taxable? Then the freight is taxable." I love those states.

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Installation Charges

This is one of a series on how to handle items that affect the "basis" of tax.

Installation charges are often included in the basis of the tax calculation...in other words, they're often taxable. Installation charges include pretty much any on-site charges related to setting up a product.

They typically don't include charges that happen at the seller's facility. Those would typically be include in the normal selling price and therefore taxable in all cases. But installation charges might be taxable or might not, depending on the state.

Short and joke-free topic today. I swear I tried. But, I mean, installation charges?

Sales Tax Guy

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Coupons

This is one of a series on how to handle items that affect the "basis" of tax.

There are two types of coupons (in the sales and use tax world, anyway): manufacturer's coupons and store coupons.

A manufacturer's coupon is one of those things you get in the mail, typically issued by the manufacturer, giving you some discount on your purchase.

A store coupon is also a piece of paper, and you may get it in the mail. But it's fundamentally different.

The difference is that the store coupon essentially acts as a price or quantity discount. The store (the seller) is actually giving you a discount, just like a mark-down in the store. You just have to do a little coupon clipping to get the discount. But the key thing is that the store is incurring the cost of the honoring coupon.

In the case of a manufacturer's coupon, you hand them the paper, and they give you the discount. But the store (seller) will be reimbursed by the manufacturer for the discount offered by the coupon, plus a little extra for processing. The key thing here is that the store incurs no cost to honor the coupon. That cost is born by the manufacturer.

In effect, the store is receiving the full amount of the selling price! They're receiving some money from you. And they're receiving the rest of the money from the manufacturer. So they really sold you the item for the full amount, as far as they're concerned.

While there are exceptions, most states consider manufacturer's coupons to operate the same way as rebates - they do NOT reduce the basis of the tax. The tax you pay will be on the original selling price before the coupon.

But store coupons are almost universally treated just like price and quantity discounts. They reduce the selling price.

Don't believe me? Next time you're in a big store, like Target, or your local chain grocery store, see how they handle that manufacturer's coupon on the receipt. The tape will show that they gave you the discount, but they charged you tax on the original selling price.

That is, unless you're in one of the few states that treat both types of coupons the same. In those glorious places, both coupons reduce the selling price.

Sales Tax Guy

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Rebates

This is one of a series on how to handle items that affect the "basis" of tax.

Let's say you're interested in a computer - the Univac Model 4206. If you buy it from Gene's Finer Computing Machines, he will charge you his "friend" price of $100,000 (it's a nice computer).

In today's mail, you got a letter from Univac offering you a rebate of $5,000 if you buy your 4206 before the end of the month. That works for you so you get yourself over to Gene and buy that computer. You mention that the rebate brought you in, and Gene kindly offers to handle the rebate for you if you'll sign it over to him.

Gene sells you the computer and the invoice shows:



The basis for the tax calculation is $100,000, not 95,000. The reason is that, while it looks like you're getting a discount which ought to reduce the tax base, you're really paying $100,000. $95,000 is coming out of your pocket and $5,000 is being paid by Xerox. As far as Gene is concerned, he's still sold that copier for $100,000 and that is what he'll report as his gross sales.

Think about it this way. Maybe Gene wasn't able to cash in the rebate for you. In that case, you'd file for that rebate later. Then Gene is obviously going to have to charge you sales tax on the full $100,000.

So rebates generally do NOT reduce the tax basis because the original sale amount is still being paid. There are a few states that do reduce the tax base by rebates but you could count them on the fingers of one hand. And there are some states that handle rebates for vehicles differently. Check the local laws.

Here is a later article on a related topic - coupons.

Sales Tax Guy

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Golden Rule: The Basis of Tax

This is one of a series on how to handle items that affect the "basis" of tax.

Once we have determined that a sale is taxable, there remains another problem. We are going to add sales or use tax of, say, 7%. But 7 % of WHAT?



The invoice above is taxable because stuff is always taxable (that joke sounds better when I do it in the seminar - trust me). So obviously the 7% is going to be applied to the merchandise total of $91,000. But what are we going to do with those extra things, like coupons, rebates, freight charges, etc.

The rule is generally known as basis of tax - what we are going to take 7% of. Basis of tax deals with the extra items on an invoice, that is already taxable, and whether those items will be added to the basis or subtracted from the basis. So here's the actual golden rule:

All of the charges on a taxable invoice will be added to the tax basis and are therefore taxable. But all of the deductions from a taxable invoice will NOT reduce the tax basis...they have no effect on the tax.

This sounds unfair. But when you start taking apart these rules in each state, you'll find there are LOTS of exceptions. But it's helpful to start with the assumption that any charges will be added to the taxes. But deductions do not reduce the taxes.

Also, remember - this rule is only relevant if the sale is taxable. If the sale (or purchase) wasn't taxable, then forget about it. Move along, nothing to see here. We don't care about those extra items...there is no basis of tax if there isn't a tax in the first place..

For example: If I'm charging a customer freight for a shipment of no-charge parts that are covered by a warranty, then the sale isn't taxable. And the freight charge won't be taxable either. If there is no taxable sale, there's no tax. And there won't be any basis. So you're finished.

That's the theory, anyway. I have seen some weird spins on these rules, so it's important to check the applicable state's rules to make sure you're not missing anything. For example, some states will say that installation charges are taxable, regardless of the taxability of the sale of the stuff being installed. Go figure.

Sales Tax Guy

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Bad Debts - Save Money!

This is one of a series on how to handle items that affect the "basis" of tax.

I was doing a seminar a few months ago in and, near the end of the day, one of the participants said, “Jim, you just saved me $30,000.” He had just written off a $500,000 taxable sale as a bad debt. And he had just realized that he could reduce his taxable sales by that amount. Since the tax rate in his state is 6%...well, you do the math. I had been talking about bad debts and their effect on sales and use taxes.

If you sell something and charge tax, and the customer never pays you for the purchase, you’ll eventually write it off. Almost every state gives you the ability to recover the sales or use tax on that bad debt. They either allow it through a credit, refund or, most commonly, by simply deducting the bad debt from your taxable sales in the month you write it off. The method is usually clearly stated someplace in the instructions or law.

Because the people doing the sales and use tax return are usually NOT in the accounts receivable department, they probably don’t even think about bad debts, let alone their impact on the return. If you’re preparing the return, and you’re not adjusting for bad debts, then you’re throwing money away. If you’re not the one who prepares the return, then check out what YOUR company is doing. I won’t say you’ll save $30,000, but you’ll probably pay for your subscription to this blog.

Sales Tax Guy