Everything sales tax-related is more complicated for e-commerce sellers. Sales tax on shipping charges is no different.
As an e-commerce seller, the product has to get to the customer somehow. In most cases, that means the nice guy or gal in the big box truck places the goods they bought from you gently (we hope) on your doorstep.
And we also know that, in most cases, an e-commerce seller is required to charge sales tax when making a sale. However, as with most things sales tax, states vary on whether or not they consider shipping to be part of the sale, and thus taxable.
Some states consider shipping charges to be separate from the transaction. In these states, as long as you let the buyer know what amount they are paying for the product and what amount they are paying for the shipping, the shipping charge isn’t taxable.
But most states argue that in an e-commerce sale, the item can’t get to the buyer without being shipped. To these states, shipping is inherently part of the transaction. They require e-commerce retailers to charge sales tax on the product and the shipping charge.
As a modern e-commerce retailer, it’s likely you have nexus in multiple states. This may mean including shipping in taxable charges in one state while excluding shipping from sales tax calculations in other states.
This guide will show you where shipping is and is not taxable, and provide guidance on how to handle sales tax on complicated situations, such as when only part of a shipment contains taxable items.
Important: The below list assumes that you are making a “standard” e-commerce sale where you ship the item to a buyer via a carrier like UPS, USPS, FedEx or DHL. States have different rules when it comes to private delivery, or having the carrier bill the customer.
States where Shipping Charges are Taxable
The following states consider shipping charges a taxable part of an e-commerce transaction.
States where Shipping Charges are Non-Taxable
These states consider shipping separate from an e-commerce transaction and non-taxable, though with exceptions. For a shipping transaction to be considered non-taxable you must separately state the shipping charges on the invoice.
My customer’s order includes both taxable and non-taxable products. How do I handle sales tax on shipping charges?
Generally, if a product is not taxable, then you also don’t have to charge sales tax on the shipping of that product.
But say you sell a non-taxable Captain America t-shirt and a taxable coffee cup with a funny quote on it to a buyer in Pennsylvania.
In most cases, the portion of the shipping charge used to ship the coffee cup is taxable while the portion of the shipping charge used to ship the t-shirt is non-taxable.
States like Rhode Island and South Dakota advise dividing the shipment up by either price or weight.
To divide the shipment by price, simply figure out which proportion of the shipping charge corresponds to the sale price. For example, your buyer paid $20 for the t-shirt and $20 for the coffee up. You can simply divide the $5.00 shipping in half. The first $2.50 is taxable (the coffee cup) and the $2.50 is non-taxable (the t-shirt.)
States also recommend dividing by weight. Say the t-shirt weighs five ounces and the super heavy coffee cup weighs 20 ounces. In this case, you’d charge sales tax on the $4.00 it took to ship the coffee cup and you would not charge sales tax on the $1.00 it took to ship the non-taxable t-shirt.
Keep in mind, every state is different and some states even have special rules when it comes to how they want you to allocate sales tax on shipping.
What if I offer free shipping?
Customers love free shipping, and you will too when you hear that if you don’t charge for shipping, you also don’t need to charge any sales tax!
Help! I’m not sure I’m charging sales tax correctly on shipping charges!
HOST is here to help. We’ve been assisting e-commerce merchants with sales tax struggles for the past 25 years. Contact us today for a nexus evaluation so you can be sure you’re charging the right amount of sales tax on shipping.