Should you charge sales tax on shipping?

Sales tax on shipping

Whether or not you should charge sales tax on shipping charges depends on several factors

Shipping charges may be exempt from sales tax if some or all of the following apply:

  1. Delivery by common carrier or USPS
  2. Charges stated separately and not bundled with other charges such as handling
  3. Shipping charges are not included in the price of the item
  4. Purchased items are tax exempt
  5. If shipment includes both exempt and taxable property the seller should allocate the delivery charge and tax the non-exempt portion.
  6. Charges paid by purchaser
  7. Delivery and billing by independent contractor who is not the seller and paid by the purchaser
  8. Delivery charges are optional
  9. Delivery is separately contracted
  10. Items delivered outside the state
  11. Retailer is engaged in a separate delivery business
  12. Shipment is made direct to the purchaser
  13. Shipment occurs after title passes to purchaser

 

Taxability of shipping rules by state

Some states apply sales tax on shipping based on the shipping agreement in relation to the item’s transfer of title to the purchaser while others treat shipping as a non-taxable service if contracted for independently. Some states try to merge these two approaches thereby creating a patchwork of regulations and opaque rules.

While not a fail-safe approach, here are a few best practices to improve your company’s chances of avoiding having to collect sales tax on shipping: Have the buyer pay the freight charges; bill the transportation charges separately following the sale; pass the title to the purchaser before shipping; and use a common carrier or the US mail.

Following is a list of the basic tax on shipping rules for each state and a few of their most general exceptions and caveats.

Refer to the numbered exemptions listed above

Alabama – Shipping is not taxable in Alabama (AL) if 1 and 2.

Arizona – Shipping is not taxable in Arizona (AZ) if 2.

Arkansas – Shipping is taxable in Arkansas (AR).

California – Shipping is not taxable in California (CA) if 1, 2, 7 or 13.

Colorado – Some shipping is taxable in Colorado (CO) except if 2, 3 and 8; certain localities may tax all shipping.

Connecticut – Shipping is taxable in Connecticut (CT) except 4.

District of Columbia – Some shipping is taxable in the District of Columbia (DC) except when 2 and 13.

Florida – Some shipping is taxable in Florida (FL) except when 2 and 8 or 2 and 13.

Georgia – Shipping is taxable in Georgia (GA) with certain exceptions.

Hawaii – Shipping is taxable in Hawaii (HI) except 10.

Idaho – Shipping is not taxable in Idaho (ID) if 2.

Illinois – Some shipping is not taxable in Illinois (IL) if 9.

Indiana – Shipping is taxable in Indiana (IN) but 5.

Iowa – Shipping is not taxable in Iowa (IA) if 2 or 9 but 5.

Kansas – Shipping is taxable in Kansas (KS) but 5.

Kentucky – Shipping is taxable in Kentucky (KY)

Louisiana – Shipping is not taxable in Louisiana (LA) if 2 and 13.

Maine – Some shipping is taxable in Maine (ME) except when 1 and 2 and 12 all apply.

Maryland – Shipping is not taxable in Maryland (MD) if 2.

Massachusetts – Some shipping is taxable in Massachusetts (MA) except when 2 and other exceptions.

Michigan – Shipping is taxable in Michigan (MI) except when 11 or 13 but 5.

Minnesota – Shipping is taxable in Minnesota (MN) but 5.

Mississippi – Shipping is taxable in Mississippi (MS)

Missouri – Some shipping is taxable in Missouri (MO) except when 2 and 8.

Nebraska – Shipping is taxable in Nebraska (NE) but 5.

Nevada – Some shipping is taxable in Nevada (NV) except 2 and 13.

New Jersey – Shipping is taxable in New Jersey (NJ) except when 4.

New Mexico – Shipping is taxable in New Mexico (NM)

New York – Shipping is taxable in New York (NY)

North Carolina – Shipping is taxable in North Carolina (NC) but 5.

North Dakota – Shipping is taxable in North Dakota (ND) but 5.

Ohio – Shipping is taxable in Ohio (OH) but 5 and except 6.

Oklahoma – Shipping is not taxable in Oklahoma (OK) if 2 and 3 but 5.

Pennsylvania – Shipping is taxable in Pennsylvania (PA) except when 4 or 7.

Rhode Island – Shipping is taxable Rhode Island (RI) except 7.

South Carolina – Shipping is taxable South Carolina (SC) except 13.

South Dakota – Shipping is taxable in South Dakota (SD) except 7 but 5.

Tennessee – Shipping is taxable in Tennessee (TN) except 7.

Texas – Shipping is taxable in Texas (TX) except 7.

Utah – Some shipping is taxable in Utah (UT) except when 1, 2 and 3 but 5.

Vermont – Shipping is taxable in Vermont (VT)

Virginia – Shipping is not taxable in Virginia (VA) if 2.

Washington – Shipping is taxable in Washington (WA) except 13.

West Virginia – Shipping is taxable in West Virginia (WV) except 1 , 2 and 7.

Wisconsin – Shipping is taxable in Wisconsin (WI) but 5.

Wyoming – Shipping is not taxable in Wyoming (WY) if 2.

As always, we recommend you consult with the department of revenue for any state in which your company has nexus and ask for a determination in writing whenever the rules are confusing or contradictory.

Hawaii lets online travel companies off the hook for transient AT

transient accommodations tax

transient accommodations tax

Hawaiian hotelsAnother state has been thwarted in its efforts to extend sales taxes to online travel companies (OTCs). On March 17, Hawaii’s Supreme Court awarded OTCs a partial victory, unanimously holding Travelocity and other OTCs were not liable for Hawaii’s transient accommodations tax (TAT), although they do have to pay a general excise tax (GET). The decision is likely the first ruling from a state supreme court on this subject. Previously, intermediate appellate courts in Colorado and North Carolina rejected state efforts to collect lodging taxes, which are similar to Hawaii’s TAT.

In 2011, Hawaii’s director of taxation assessed nearly a dozen OTCs for unpaid excise and transient accommodation taxes. The excise tax is not a sales tax. Hawaii’s GET is a tax on the gross receipts of businesses. On most services the GET is 4% or 4.5%. A business may elect to pass the GET onto its customers, which makes it seem like a sales tax, but it is not required to do so.

The TAT is a 7.25% sales tax on hotel rooms. The “operator” of the hotel or accommodation is responsible for collecting the tax and remitting it to the state. OTCs, of course, do not own or operate hotel rooms. They contract with hotels to sell rooms online. The hotel charges the OTC a net rate for the room; the OTC then sells the room for a price above the net rate and keeps the difference.

Nobody disputes the hotels are liable for the GET and TAT on their respective share of the room sales. But the OTCs argued they should not have to pay either tax on their markups, as they neither physically conduct business within the state of Hawaii nor personally operate any hotel rooms. The Hawaii Supreme Court, following the leads of the intermediate courts in Colorado and North Carolina, agreed with the OTCs on the latter point. The court rejected the director of taxation’s efforts to expand the definition of “operator” under the TAT to OTCs.

Hawaii law imposes the transient accommodations tax on businesses involved in the “actual furnishing of transient accommodations.” The word “actual” is key here, the court explained, because it indicates the Hawaii legislature only intended to tax a single “operator” per hotel room. The law “does not contemplate or allow for multiple operators when a transient accommodation is furnished.” This means only the hotels, and not the OTCs, are responsible for the TAT.

However, the OTCs are liable for the GET, because that is a tax on both the “operator” of a hotel and any travel agency or tour packager. In this context, the court said, OTCs are travel agencies. And even if they lack a physical presence in Hawaii, they remain subject to the excise tax because they “receive income by virtue of selling the right to occupy hotel rooms located in Hawaii.” Still, the court’s decision will significantly reduce the OTCs’ tax bill, which would have been over $250 million had the state prevailed on the TAT issue.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

Colorado’s Internet tax law questioned but federal law questioned as well

Colorado’s Internet tax law

Colorado’s Internet tax law

On March 3rd, the U.S. Supreme Court dealt a potentially crippling blow to Colorado’s efforts to force out-of-state retailers to assist the state’s efforts to collect use taxes on Internet and mail order purchases. While the court unanimously sided with retailers opposing Colorado on a key jurisdictional question, at least one justice expressed concern that states have been unfairly restrained in taxing Internet purchases.

Direct Marketing Association v. Brohl

Colorado legislators adopted a law in 2010 imposing a number of reporting requirements on out-of-state retailers who do not otherwise maintain a physical presence in the state. First, these retailers had to inform all of their Colorado customers they were liable for use tax on their purchases. Second, retailers had to send a specific notice to each Colorado customer who purchased more than $500 worth of goods during the previous year about their use tax liability. Finally, retailers had to provide the state’s Department of Revenue with the names, addresses and total purchase amounts for each of their Colorado customers.

Colorado's internet tax law

Justice Kennedy’s assertion that it may be time to do something about the outdated Quill decision is highlighted if you look at the number of states that have attempted to enact their own version of Internet sales tax legislation.

The Direct Marketing Association (DMA), a trade group representing Internet and mail-order businesses, asked a federal judge for an injunction to prevent Colorado from enforcing this law. The judge granted that injunction in March 2012, holding Colorado’s Internet tax law requirements violated the Commerce Clause of the U.S. Constitution. Under the landmark 1992 U.S. Supreme Court decision in >Quill v. North Dakota, the Commerce Clause forbids a state from requiring retailers who do not maintain a “physical presence” within the state to collect its taxes. Here, the judge agreed with the DMA that the three reporting requirements “impermissibly imposed undue burdens on interstate commerce” and were therefore unconstitutional.

But in 2013, the U.S. 10th Circuit Court of Appeals reversed the trial judge’s decision. The appeals court did not address the merits of the DMA’s constitutional arguments. Rather, the three-judge panel said the federal courts lacked the jurisdiction to hear the case at all. In 1937, Congress passed a law prohibiting federal courts from issuing any injunction which interfered with a state government’s “assessment, levy or collection” of its own taxes. The 10th Circuit said that anti-injunction rule applied to Colorado’s Internet tax law reporting requirements.

The Supreme Court disagreed. In an opinion authored by Justice Clarence Thomas, the high court said the “notice and reporting requirements” in Colorado’s Internet tax law are not part of the tax “assessment” or “collection” process. In fact, Thomas said the reporting requirements precede both. For instance, the word “assessment” in the 1937 law refers to the act of recording a taxpayer’s liability; but Colorado’s law addresses efforts to gather information about the taxpayer’s liability. Thomas said the anti-injunction rule does not extend to such information gathering efforts.

Time to reconsider Quill?

In a separate opinion, Justice Anthony Kennedy wrote to express his personal belief the court should reconsider and overturn Quill v. North Dakota. Kennedy said requiring states to establish a physical presence (or “substantial nexus”) before imposing tax collection responsibilities on out-of-state retailers caused “extreme harm and unfairness to the States.” Kennedy said many states were struggling to collect use taxes on Internet and mail-order sales – Colorado alone loses about $170 million a year, he said – and given the “far-reaching and structural changes in the economy” caused by the online shopping revolution, he argued the time had come for the court to reconsider its position.

Kennedy acknowledged the DMA case was not the right time and place to address this issue, but he added, “The legal system should find an appropriate case for this court to reexamine” the Quill decision.

This may not be the last word

Although the Supreme Court said the anti-injunction law did not stand in the way of the trial court’s original decision in favor of the DMA, this case is not yet over. In a footnote to its 2013 opinion, the 10th Circuit suggested the legal principle of “comity” cautioned federal courts against interfering with Colorado’s internet tax law collection policies. Comity basically means that even if a federal court has the legal right to hear a case, it should decline to do so out of courtesy to the state’s authority. Colorado officials did not actually present a comity as a defense – and Justice Thomas said he and his colleagues took no position on the issue at this time – but the 10th Circuit may revisit the question following the Supreme Court’s decision.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Sales and use tax changes in Zip2Tax products for January 1, 2015

Sales tax rates – January 2015

Sales tax rates – January 2015

20 sales and use tax changes in Zip2Tax products since December 2014. There were changes in Alabama, Arkansas, Arizona, Colorado, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Minnesota, Missouri, North Dakota, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, Washington and Wyoming.

In Alabama, tax rates changed for Semmes, Cordova, Pine Hill, Piedmont, Florala and Hillsboro.

In Arkansas, tax rates changed for Farmington, Gassville, Harrison, Jonesboro and Quitman.

In Arizona, tax rates changed for Coconino County.

In Colorado, tax rates changed for Denver, Brush, Idaho Springs, La Veta, Boulder County and City, Larimer County, and Windsor.

In Florida, tax rates changed for Brevard, Charlotte, De Soto, Escambia, Hernando, Highlands, Leon, Monroe, Orange, Seminole and Volusia Counties.

In Georgia, tax rates changed for Brooks, Chattahoochee, Clinch, Muscogee, Seminole, Spalding and Twiggs Counties.

In Idaho, tax rates changed for Ketchum.

In Illinois, tax rates changed for Gurnee, New Baden, Skokie, Trenton, Vernon Hills, Waukegan, and Wilmette.

In Kansas, tax rates changed for Cherokee, Edwardsville, Goddard, Herington, Leon, Luray, Randolph, Smith Center, Utica and Chase County.

In Louisiana, tax rates changed for Doyline and Homer.

In Minnesota, tax rates changed for Todd and Fillmore Counties.

In Missouri, tax rates changed for Ralls and Webster Counties, Hazelwood, Jennings, St. Ann, Sparta and Warson Woods.

In North Dakota, tax rates changed for Beulah, Fredonia, Harvey, Hazelton, Lignite, and Velva.

In Nebraska, tax rates changed for Battle Creek and David City.

In New Mexico, tax rates changed for Colfax, Curry, Grant, Harding, Quay, San Juan, San Miguel, Sierra and Valencia Counties, and Vaughn and Lovington.

In Oklahoma, tax rates changed for Comanche, Leflore, Logan, and Mayes Counties, and Bridgeport, Bethel Acres and Glencoe.

In South Dakota, tax rates changed for Veblen.

In Texas, tax rates changed for China Grove and Maypearl.

In Washington, tax rates changed for Benton County, Ephrata, and Monroe.

In Wyoming, tax rates changed for Washakie County.

There were 13 states with ZIP code changes effective after December 2014 including Arkansas, California, DC, Illinois, Kentucky, Maine, North Carolina, New Jersey, New York, Ohio, Oregon, Tennessee and Texas.

To see rate changes that took effect in December 2014 please visit this article.

Download the full ZIP code change documentation.

For December 2014 changes click here.

Angel Sauer

In lieu of federal progress, Colorado passes its own version of the Marketplace Fairness Act

federal progress

Landmark law requires retailers to prove they DO NOT have nexus

On June 9, 2014, Colorado’s Gov. John Hickenlooper signed the Marketplace Fairness and Small Business Protection Act into law

Colorado’s landmark legislation requires retailers to prove their sales DO NOT create nexus for them creating new questions about what that means for online retailers doing business in the state and how they are to handle Colorado’s myriad home rule jurisdictions.

E-Commerce has fundamentally changed the way that consumers shop, with sales growing over 12% in 2013 according to the U.S. Department of Commerce. Presently e-commerce accounts for $322 billion in annual sales, representing significant growth each year from 2009 when e-commerce totaled $209 billion.

While this trend has been promising for online retailers, it’s proven to be a huge headache for state legislators who are tasked with recuperating what they see as lost sales tax from online sales. On June 9, 2014, Colorado’s Gov. John Hickenlooper signed the Marketplace Fairness and Small Business Protection Act into law, representing his state’s attempt to modernize the laws of e-Commerce sales tax to reflect current realities.

The new law expands the definition for what constitutes nexus for retailers based outside of Colorado, so that the Department of Revenue can now collect taxes from businesses that don’t have a significant physical presence in the state. Its supporters in the state legislature claim that House Bill 1269 will infuse the treasury with a stimulus of more than $67 million in sales tax during the upcoming year.

While the bill spares small businesses that have less than $50,000 in annual sales, it will have a far reaching effect on any larger retailer making sales within Colorado. This is due to a clause in the bill that creates a presumption of nexus for online retailers. The tables have been flipped, so that the burden of proof is now on the online retailers to show that they do not have nexus in the state of Colorado. If a retailer is unable to prove their lack of nexus, they will be obligated to pay state taxes.

Other states including New York, Missouri, and Maine have passed similar legislation that have been dubbed “Amazon laws” after the dominant leader of U.S. online retails sales. However, House Bill 1269 will not affect Amazon itself, since Amazon took preemptive steps and cut off its relationships with its affiliates based in Colorado. In fact, Amazon has spent millions of dollars on Capitol Hill in recent years to lobby for a nationwide internet sales tax that would grant it a competitive edge as it continues to expand.

Colorado’s bill is modeled after the similarly named federal Marketplace Fairness Act (MFA), which was passed by the Senate in May of 2013 and would grant states the authority to collect taxes from online purchases.

With little likelihood of forward progress on the MFA in the House this term, the state of Colorado has decided to try out a version of the MFA on its own. Its supporters are optimistic that its benefits will be plainly observable in the coming year, and if so, we can expect additional states to pass their own versions in the foreseeable future.

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