The mixed-up taxability of shoes and socks, shipping and handling – Wacky Tax Wednesday

“Shipping and handling” go together like “shoes and socks.” Both pairings transpose the normal order of events (we don socks before shoes and handle goods before shipping them). And both can be either taxable, exempt, or sometimes taxable, depending on the circumstances of the sale.

Shoes and socks

Let’s start with shoes and socks. Most states that levy a general sales tax apply it to the sale or use of tangible personal property, like shoes and socks. However, some states (e.g., New Jersey, Rhode Island, and Vermont) exempt most general use clothing and footwear. And some states defy easy categorization.

Connecticut used to exempt clothing and footwear costing less than $50, but now the general sales tax rate (6.35 percent) applies to most of these sales. The state also adds a luxury tax (an extra 0.65 percent) on clothing and footwear costing $1,000 or more. In Massachusetts, most individual clothing items with a sales price of more than $175 are taxable only on the amount over $175. Perhaps more confounding, New York exempts “clothing and footwear sold for less than $110 per item or pair” from state sales tax but allows localities to levy a local tax on them.

Then there are sales tax holidays. Many articles of clothing and footwear are exempt during back-to-school or general sales tax holidays. However, most sales tax holidays don’t exempt all clothing and footwear — states usually have price thresholds or other limitations. This makes sales tax compliance challenging for businesses that sell into multiple states, especially when the taxability of shipping and handling must also be considered.

Shipping and handling in Virginia

According to the Virginia Department of Taxation, “Separately stated shipping charges, including postage, are not subject to Virginia sales tax. However, shipping charges that are combined with handling or other fees as a single charge are subject to the tax.” That’s because “handling charges are subject to the Virginia sales tax.”

Businesses seeking to claim the exemption need to be sure to separate shipping charges from handling charges. The department describes the case of a taxpayer found liable for failure to collect tax on freight (shipping) and handling charges (Ruling 18-81). When the taxpayer contested the finding, the Commissioner wrote, “In this instance, the freight and handling charges are separately stated within the body of the vendor’s invoices. The same charges are shown as freight only in the invoice summary.” That discrepancy was enough to trigger a negative audit finding.

Shipping and handling in California

California taxes handling charges a bit differently. They’re taxable when considered part of a taxable sale of tangible personal property, even when separately stated. And they’re exempt when considered part of an exempt sale.

Because of this, determining taxability can get complicated when handling charges are for both taxable and non-taxable goods. According to the state tax authorities, “If the sale is partly a taxable retail sale and partly a nontaxable sale (resale), the handling charge is prorated between the taxable part of the sale and the nontaxable part of the sale, provided that the handling charge relates to both parts of the sale.”  

Shipping and handling in Nevada

Finding adequate, accurate information about the taxability of shipping and handling charges can be an exercise in frustration. A Nevada Department of Taxation tax bulletin offers refreshing clarity. It states, “Simply put, a charge solely for the transportation, shipping or postage that is separately shown on an invoice, billing or other document given to the purchaser is not taxable. However, … the law does not exempt all charges which are commonly referred to as ‘delivery charges.’”

It continues, “If the separately stated ‘delivery charge’ includes any of the following components, the delivery charge is taxable: handling, crating, preparing for mailing or delivery and packaging. … Even if a retailer chooses to separately state those charges, they are necessary to complete the sale.”

The department concludes with a warning, “The term ‘shipping and handling’ can be particularly misleading because it is difficult to know if that charge is limited to transportation, shipping or postage.” Sellers are cautioned to keep detailed, accurate records to validate how they apply tax to shipping and handling costs.

Confused and concerned? You’re not alone. Learn more about the taxability of shipping and handling charges here.