How Should Vendor Managed Inventory Transactions Be Taxed? Compliance Q&A
- Sales and Use Tax
- December 21, 2015 | Gail Cole
Sales and use tax compliance is complex, especially for vendors selling to multiple clients and shipping products to multiple states. Questions inevitably arise.
How should vendor managed inventory transactions be taxed?
Here’s the scenario: One customer from New Jersey purchases products from the vendor, who holds it in a warehouse in Texas until shipping. The vendor, who has nexus in almost all states, receives daily files from the customer with shipping information, and ships to all states. The vendor charges the NJ customer sales tax (it’s not a resale situation) and bills the customer a lump sum for the entire inventory shipped to end-users.
The vendor bills the customer a $4 fulfillment fee for each unit shipped, and that fee is not currently subject to sales tax. The customer is also billed (monthly) for any applicable storage fees, freight charges, and fees for undeliverable products. The questioner wants to know if any of these fees should be subject to sales tax?
It’s a great question. And as is often the case when sales and use tax is involved, the answer depends on the state.
Some states do not tax separately stated fees like freight charges, shipping charges, and fees for undeliverable products.
Some states do tax such separately stated fees — or they do if the shipper has nexus in the state, as the questioner in this case has indicated.
And some states may or may not tax separately stated fees. In such states, fees associated with the transfer of tangible personal property (taxable) are generally subject to sales tax, while fees associated with exempt products are generally exempt.
As ever with sales tax, it is impossible to speak in broad strokes with certainty. It is always best to err on the side of caution and charge sales tax when in doubt. It is easier to refund sales tax to a customer than to collect it when it was not collected in the first place. Any customer would be happy with a refund; few are interested in digging into their pockets to retrieve unpaid sales tax after the fact.
Have a sales or use tax question? Ask it here.