Selling products online in the United States can be very complex due to all fifty states (and the District of Columbia) each having different rules and regulations for sales tax.
Several states have declared that shipping charges are taxable when the product sold itself is taxable and when the product is shipped through a common carrier like FedEx, UPS, or the US Postal Service.
We’re going to take a look at how sales tax on shipping charges works as well as a few common exceptions.
Let’s start with an example:
If you sold a painting for $100 and the shipping was $10 in a state where shipping charges were taxable, the total taxable sale would be $110 and you would charge sales tax on the entire amount.
If you sold the same painting in a state where shipping tax is not taxable, then the taxable amount of the sale is only $100. The $10 shipping charge would not be taxable.
Most states that do not tax shipping require that you separate out the shipping charges on your invoice to allow your customer to see how much they paid in both taxes and shipping. If you ever have an audit, the state will also want to see the itemized charges.
Watch out for “Handling”
Handling refers to the labor involved to prepare items for shipping. Many states make a distinction between shipping charges and handling charges.
In some states like Virginia, handling charges are taxable but shipping charges are not. What this means is that if you separate handling charges, that charge is taxable in Virginia.
But if you combine shipping and handling into one charge in Virginia, that entire charge becomes taxable.
Not all items are taxable
Keep in mind that some states do not tax items like food or clothing. In Pennsylvania, shipping charges are taxable but clothing is not taxable. Let’s say someone ordered your $100 painting but also bought your $100 sweatshirt with the same image on it. In that case, only a portion of the shipping charges - the charges you used to ship the painting - are taxable.
You can choose to either charge sales tax on half of the shipping charge (since the taxable painting makes up half of the items included in the shipment), or you can weigh the sweatshirt and the painting and charge sales tax based on the amount of shipping that would apply to the painting alone. If the painting weighs 5 lbs and the sweatshirt also weighs 5 lbs, you would charge sales tax on $5 out of the $10 shipping charge.
Regulations vary by state
Some states are more strict than others when it comes to charging sales tax on shipping. In California, shipping is not taxable only if you charge them your exact cost to ship the item. If you charge a flat $2.99 shipping rate but it only really cost you $1.99 to ship the item, California will consider that extra dollar taxable.
A few final thoughts...
The biggest thing you should keep in mind is that there are no universal rules for charging sales tax on shipping for ecommerce purchases in the US.
Every state creates their own rules, and most of those laws were written before ecommerce was born. Most of these rules were written to be applicable to brick and mortar stores and can be confusing when applied to an ecommerce transaction.
We suggest that you use TaxJar’s article that lists states where shipping is and is not taxable. This will help you to determine what each individual state’s taxing laws apply to your own shipping charges.
You should definitely keep in mind that some states may be exceptions to one of these general rules. So if you have questions, be sure to contact each state’s department of revenue or a vetted sales tax CPA.
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