Why Is There Sales Tax on Shipping?
- Feb 17, 2016 | Laura McCamy
There are two basic approaches to sales tax on shipping. Some states view shipping (and sometimes handling costs as well) as separate from the goods ordered and not taxable. Other states consider shipping to be integral to the goods sold and, therefore, subject to the same sales taxes as the products shipped.
Shipping as a Service
Most states don’t levy sales taxes on the service of shipping. If you go to a store and buy your grandmother a pair of fuzzy bunny slippers, then ship them to her through FedEx or UPS or US Mail, you will pay only the shipping costs. Your state doesn’t add any sales tax to that charge.
If you order the fuzzy bunny slippers from an online retailer and the retailer charges you for shipping at cost and lists that charge on a separate line, you won’t have to pay sales tax on the shipping charge in states like Arizona, California, Massachusetts, and Oklahoma.
However, if you live in Illinois and order the bunny slippers from a retailer with Illinois sales tax nexus, the shipping will be taxable. Read on to find out why.
The Illinois Case
If there is a trend in sales tax on shipping, it is toward treating shipping as a taxable part of the order. As more and more retail sales move online, the issue of sale tax on shipping has come to the forefront. It has even been the subject of several lawsuits.
One of the most-watched lawsuits was Kean v. Wal-Mart Stores. The case was brought by a customer in Illinois who believed she should not have been charged sales tax on shipping for a trampoline she ordered online. The court sided with Wal-Mart, ruling that the shipping was an indispensible part of the order because the customer was not given the option to pick up the merchandise at the store. Illinois has updated its sales tax regulations as a result of this case.
So let’s go over this one more time. In one example, a customer has a choice to pick up a new suitcase at the store or have it delivered. Even if they choose delivery, the shipping charge is not taxable. In this case, shipping is an option but not necessary to the sale. In a second example, the customer orders the suitcase online and is only given the option of having it shipped. In this instance, the shipping is as integral to the suitcase purchase as the handle or the little wheels that roll in all directions. Without shipping, the customer can’t buy the suitcase.
Charging Sales Tax on Shipping
Some states, such as Georgia and Wisconsin, levy sales tax on shipping no matter what choices the customer is given about pick up and delivery. The only workaround in these states is for the customer to arrange for delivery on their own and pay the carrier directly. This is cumbersome and probably not worth the effort, unless you are selling gold ingots or some other heavy item where the shipping charge (and thus the sales tax on it) is significant.
And then there’s Indiana (there’s always one), which does charge sales tax on shipping -- unless you use the US Mail, in which case the delivery charge is tax-free. Indiana likes to keep its postal workers busy.
Sales tax on shipping doesn’t amount to much, but it can add up over time. Understanding the rules can save you from owing back taxes plus penalties and interest in the future. Sales tax compliance software can help you keep abreast of the rules about this tiny tax that can add up to big headaches.