Colorado Sales Tax Guide
Chapter 8: Understanding Colorado sales tax rules for shipping & handling
Sales taxes is complex in Colorado. It’s renowned as one of the most complicated states in which to manage sales tax collection and filing. Why should sales tax on shipping in Colorado by any different? You might think the state’s funky sales tax rules are a reflection of its laid-back vibe, but other states (including Illinois and Florida) have similar rules as well.Is Shipping Taxable in Colorado?
Colorado defines “transportation charges” to include handling as well as shipping and delivery, so the two are not treated separately. Whether shipping and handling are taxable is not such a simple question.
The state’s webpage on this issue starts out by saying that Colorado considers “transportation of tangible personal property between a retailer and purchaser” to be a service and therefore not subject to sales tax. There are a couple of conditions you have to meet, however, before shipping and handling is nontaxable.
As in many other states that exempt shipping and handling from sales tax, you must state these charges on a separate line on your invoice. And Colorado doesn’t want any monkey business; if you think you can sneak some of the cost of the order into a handling charge and put it on a separate line to avoid sales taxes, think again. The state has a rule explicitly forbidding this.
Separating them out is not enough to keep your shipping charges free from sales tax liability, however. You have to meet one more condition: The shipping has to be separable from the sales transaction. In other words, the customer has to have a choice of having the order shipped or picking it up at your location.
When questioned about this, a helpful Colorado sales tax division employee suggested you should use a reasonableness test to determine whether a customer actually has the option to pick up an order from you instead of having it shipped. If you are both in the same city, that is reasonable. If you are 200 miles apart, reasonableness starts to stretch thin.What About Tax-Exempt Orders?
If the goods you are shipping are tax exempt, so is the shipping and handling.
Colorado doesn’t have an explicitly stated rule about what to do if you ship an order where some of the goods are subject to sales tax and some are tax exempt. A call to the Department of Revenue for clarification got us this advice: The key is to survive an audit.
Whatever you do (and prorating the sales taxes on the shipping cost by weight is a good practice – it’s hard to argue with that), keep notes about how you calculated the sales tax on shipping and why that you can show an auditor, should the question ever arise. And be consistent: develop a policy and handle your sales tax on shipping of mixed taxable orders the same way each time.FOB or Not FOB
The term FOB comes from the maritime world and stands for Free On Board. What it means is that the buyer takes ownership of the purchase at the moment it leaves the seller. If you are shipping to your customer FOB, then delivery is a service the buyer is contracting for on goods they already own. In this case, delivery is not taxable, even if you provide it and charge for it.
If you personally deliver items from your store and charge your customers a delivery charge, this FOB rule can make a difference. For example, if you make furniture and a customer pays you for a rocking chair that’s in your studio, then she now owns the chair. If you charge a delivery fee to take it to her house, that charge isn’t taxable.
However, if she says she wants the chair and promises to pay for the chair and delivery once you get to her house, the delivery charge is taxable. Unless she had the choice to pick up the chair at your studio and you state the delivery charge on a separate line — then you’re back to the first way that freight charges are tax-exempt in Colorado. Got it?Freight In or Freight Out
One more Colorado caveat: While freight out might not be taxable, freight in always is. The freight charges you pay when goods are delivered to you (freight in) are considered part of your cost of goods sold. Even if you invoice your freight in costs on a separate line, you will need to collect and remit sales tax on them in Colorado (and most other states, for that matter).Rocky Mountain Sales Tax High
The Colorado Department of Revenue pointed us to a list of common tax errors to avoid, but none of the errors have to do with shipping. If you have nexus in Colorado and you are worried about getting your sales taxes right, you might want to call the state for help figuring it out. You may also find that tax-compliance software eases your burden, especially if you have nexus in multiple states.