Auditing Exemption Certificates
We field a lot of interesting questions about sales tax. This week we highlight the challenges of applying sales tax to freight surcharges.

To help cover the costs of shipping extra heavy items, we’re considering adding a surcharge on top of our flat rate shipping. We have nexus in Florida, New York, and California. Will the freight surcharges be taxable?

Great question!

The taxability of delivery charges is often (but not always) linked to the taxability of the items being shipped.

Delivery charges for exempt items are often exempt. However, some states may slap sales tax on a delivery surcharge even though actual delivery charges are exempt. In some states, the extra fee is only taxable if it is greater than the actual freight paid. In some states, any fee added may be construed as a handling or other service charge and therefore taxed.

In states where delivery charges are taxable, freight surcharges will likely also be taxable as part of the delivery charge. But the details of the actual application of tax to the surcharge are really important. Taxability can vary depending on if delivery charges are separately stated, or a mark-up over actual freight charges, or how they’re labeled, or whether or not you use a third party delivery service.

California

Delivery charges are exempt in California when separately stated and the delivery is completed by a third party common carrier. However, any charge that exceeds the actual amount paid to a common carrier is not exempted (so depending on the amount of the questioner’s freight surcharge, it may be exempt or it may be taxable or part of it could be exempt and part of it could be taxable).

Any charges labeled ‘handling’ are always subject to sales tax.

The California State Board of Equalization has published volumes on this topic. Grab some coffee and read it here.

Florida

Delivery charges are subject to sales tax in Florida under Fla. Admin. Code Ann. 12A-1.045 (1) unless they are separately stated and optional. “The charge for transportation services is not subject to tax when both of the following conditions have been met:

  1. The charge is separately stated on an invoice or bill of sale; and
  2. The charge can be avoided by a decision or action solely on the part of the purchaser.”

For example, if the customer has the option of picking up a purchased item and in so doing can avoid delivery charges, the charges are exempt from sales tax even when the customer opts to pay for delivery.

New York

Charges related to the delivery of taxable goods are generally subject to sales tax in New York when they are included on the seller’s bill of sale or invoice. However, if a customer separately arranges and pays a third-party to deliver the item, those delivery charges are exempt. Key to this is the fact that the customer arranges the delivery.

Charges related to the delivery of exempt goods are generally exempt. This is also true when the sale is exempt because the customer provides the seller with a resale or exemption certificate.

Charges related to the delivery of both taxable and exempt goods may be subject to sales tax and they may be exempt:

  • When taxable and exempt products are combined into a single charge on one bill, shipping is taxable.
  • When all charges, including delivery charges for taxable goods and delivery charges for exempt goods, are listed separately, then delivery charges for taxable goods are subject to sales tax and delivery charges for exempt goods are exempt.
  • When there is only one charge to deliver all items, it is treated as part of the taxable portion of the bill and subject to sales tax.

See New York State Department of Taxation and Finance TB-ST-838 for more examples.

Still confused about sales tax rules on delivery charges? Check the taxability rules section in our Q&A forum. If you don’t see what you need, ask a question!