Tennessee Sales Tax Guide
Chapter 8: Understanding Tennessee sales tax rules for shipping & handling
If you run an ecommerce business, you have to ship products to customers all over the nation. And if you charge your customers for the delivery of those products, it’s important to understand the rules surrounding sales tax and delivery charges.
If your business is located in Tennessee, or if you have nexus in the state, here’s an overview of what you should know.
Is Shipping Taxable in Tennessee?
According to the Tennessee Department of Revenue, Delivery charges are considered part of the sales price of an item if the seller charges the customer for the delivery. The state says that it doesn’t matter if the delivery charges are stated separately on the invoice, are included in the lump sum total, or what the terms of the shipping are.
On its website, the Tennessee DOR makes it clear that this statue supersedes the prior Sales and Use Tax Rule 1320-5-1-.71. That rule was replaced in 2008 when Tennessee became compliant with the Streamlined Sales and Use Tax Agreement, which makes shipping and delivery charges a part of the sales price.
Because the charges are considered part of the sale, retailers should always charge sales tax on delivery charges. The only exception to this rule is if the items sold are exempt from taxes — in that case, sellers should not charge sales tax on shipping.
Impact of Delivery Methods
The Tennessee Department of Revenue defines delivery charges as “charges for transportation, delivery, shipping, shipping and handling, incoming freight, outgoing freight, packing, crating, and postage.” The DOR goes on to further define “handling charges” as those costs incurred by the seller to prepare products for shipping, such as the retrieval of products from inventory, cleaning the inventory stock, and inspecting, crating, or packing the products.
If you charge a customer for shipping and handling for a taxable item, you should charge sales tax on those fees. But if you charge the customer to deliver an exempt product, or ship an item out of the state, you don’t need to add sales tax to the charge. Sellers are only responsible for charging sales tax on delivery when they bill the customers for it. For example, if your customer contracts with a third party carrier for the delivery of the product, it is not your responsibility to collect sales tax on that transaction.
What About Shipping Tax-Exempt Stuff?
If a customer purchases a combination of taxable and exempt items and you ship them in a single package, you will have to allocate the delivery charges to determine which portion is subject to sales tax. Do this by figuring out what percentage of the package is taxable and what percentage is exempt using either price or weight, and then charge sales tax only on the taxable portion of the shipping charges.
What About Local Taxes?
Tennessee charges a sales tax rate of 7 percent. An additional 2.75 percent is charged by local municipalities. According to a representative from the Tennessee Department of Revenue, “Generally, the local option tax applies to all goods and services that are subject to the state sales tax, and if an item is exempt from state sales tax, it is also exempt from local sales tax. However, there are a few exceptions.”
She says the only exceptions have to do with electric power or energy, interstate and international telecommunications sold to businesses, and television and video services provided through wireline facilities.
Finally, when we asked the representative what common mistakes ecommerce sellers make in regards to delivery charges and sales tax, she said, “A common mistake the Tennessee Department of Revenue sees sellers making in regards to delivery charges is the failure to collect tax on the charges. Delivery charges are subject to the sales tax (state and local). However, sellers sometimes do not include these charges in the taxable sales price.”