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.
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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18 comments:
This question just came up. Some of our orders are freight billed. In this case when we get the monthly freight bill, we create a voucher and reference the job and price on the voucher line. The system automatically creates a receivable invoice to the customer when a specific GL account is used on the voucher line. The resulting receivable invoice references the customer order but there is no billing of the material shipped, this is a separate invoice just for freight. How does this play into the whole scenario? Does the fact that it's billing just for the freight make a difference here?
To summarize, if you are billing your customer for freight on a separate invoice from the actual merchandise, it generally doesn't make any difference. They key part is that you, the vendor, are billing the freight as opposed to the carrier.
Jim, do these tax benefits vary across each state?
Yeah...see the bolded text at the end of the above article.
So if I'm billing a taxable customer freight for an item we ship them, which is the exact amount that UPS charges me to deliver the item, the freight charge is not taxable (in Ohio)?
Here's your answer
http://tax.ohio.gov/divisions/communications/information_releases/sales/st200702.stm
Jim, I place a taxable order from a wholesale house. They have the material shipped directly to me by truckline. They never touch the material. When they bill me is the freight taxable? In Florida?
About the above comment. I forgot to state that the freight is billed as a separate line item and is the exact amount they were billed by the truckline.
These guys did a good job of answering:
http://www.jonescpa.pro/blog/2010/is-freight-or-shipping-taxable-for-sales-tax-purposes-2
This is frequently OK depending on the state. Check the MI web site and see if they give you an answer. Almost all states have info about freight charges because, as you can see from the comments above, it's a frequently asked question.
Regarding LA, A company invoices FOB Origin, Origin = LA. The company's invoices has one line for merchandise, and a second line for frieght. Is this considered separately stated, and thus not subject to sales tax? Lastly, if the freight line actually consists of shipping and handling charges + UPS actual freight expense, (but invoice just has one dollar amount saying "freight"), is this then taxable, as to be not considered "separately stated?"
The fact that the freight charge is separately stated is rarely the only thing that makes freight not taxable. If you're talking about CA, I'd suggest reading this publication - it's complicated...
https://www.boe.ca.gov/formspubs/pub100/
Can you charge tax for inbound transportation fees for deliveries in Oklahoma. You have the merchandise that is taxable, freight charges that are taxable and then the inbound transportation fees that are taxed. Is this allowed?
Here's an article I found by Googling "oklahoma sales tax inbound freight"
http://www.ok.gov/tax/documents/LR%2012-008.pdf
I think it answers the question.
what if I am offering free shipping to a taxable state so we are not charging the shipping rate am I still to charge the customer the tax rate on the shipping charge that was reversed?
Interesting question. I would say that if you did not charge freight on the invoice for the product, than it's not taxable. However, if you charged freight, then later reversed, credited or refunded that charge, then you'd probably have to charge tax on the original invoice.
See disclaimer.
Jim,
Do you have any references on the taxability rules for transportation services on vehicles sold at retail and wholesale?
Facts:
Dealer is a salvage auction dealer with locations in all states.
Dealer is merely the broker of the transportation(third party common carrier performs the transporation service).
Dealer bills the buyer a transporation fee.
Buyer does not get a bill from the common carrier.
Dealer sells at wholesale and retail.
Considering the salvage vehicles are "wrecked", would towing tax rules apply?
You have to look at the rules for each individual state.
If you're adding the transportation fee to a taxable bill, then you may have to charge tax on the fee as well. Unless there's an exception, any extra fees on a taxable invoice are included in the base.
Regarding towing rules, again, each individual state will have different rules.
Best starting place is the state's web page.
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