Everything you need to know about FOB shipping

When you think about the acronym FOB, you might think of Fresh Off the Boat (a term for a recent immigrant to the US, as well as a TV comedy). If you’re a fan of the Victorian era, the term might bring to mind an image of an elegant watch fob. But for sellers who deal with delivery -- and sales taxes -- FOB is all about shipping.

A short history of FOB

In shipping terms, FOB is short for Free On Board. The term comes from the maritime shipping world and describes who was liable for damage to goods while in transit by sea: the buyer.

When ownership of a shipment transferred from seller to buyer as the goods crossed the ship’s rail, the goods were referred to as "free on board." If the ship sank, the buyer would be on the hook for an FOB shipment because the buyer had already taken ownership.

Origin vs. destination

When an order is "FOB origin," it means the transfer of ownership happens when it leaves the seller’s hands. If any shipping is required to get the goods to the buyer, the buyer will contract for that shipping and pay for it. This can also be referred to with the name of the city, such as FOB Boston, FOB Honolulu, or FOB San Francisco.

"FOB destination" means the buyer takes ownership when the goods are delivered to the buyer’s doorstep. The seller is responsible for arranging and paying for transportation to the buyer (though the seller may charge the buyer for those transportation costs) and is also liable for any damage while the goods are en route to the buyer.

The term FOB is more likely to come into play on shipments of large goods (office furniture, tubas, lawnmowers) and business-to-business or wholesale shipments. Not many Etsy sellers will tell you they are shipping your dreamcatcher earrings "FOB Dallas."

Why FOB matters

For businesses shipping a lot of goods back and forth, understanding FOB is the key to knowing who is liable for the safe delivery of a shipment and who owns the goods at any given point in the shipping cycle. This can also be important information for accountants, who may record the moment a transaction takes place based on where a shipment is FOB.

FOB and sales tax compliance

If you have nexus in a state that charges sales tax on shipping, FOB may become your friend. For packages that are FOB origin, the buyer will often contract with the shipper and pay the freight costs directly, not arranging it through you, the seller. In that case, the buyer generally will not have to pay sales taxes on the shipping costs, since most states exempt freight charges paid directly to carriers from sales tax.

Even if you deliver goods to your customers in your own vehicle, FOB could save the buyer from paying sales taxes on your delivery charge. For example, if a customer pays you for a floor lamp from your lighting store and takes ownership of that lamp at the store (FOB origin) and asks you to deliver the lamp in your truck, your delivery charge will be nontaxable in most states. If the customer pays you for the lamp on delivery (FOB destination), some states will add sales tax to your delivery charge. In either case, make sure you document where the transfer of ownership takes place so you have backup in case of an audit.

FOB is just one of the many complexities of dealing with varying sales tax rules across multiple states. Don’t let it sink your ship! Avalara can help you navigate sales tax compliance with ease.

Have further questions about sales tax on shipping and handling? Our State Sales Tax Guides can help!

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