Can a retailer charge sales tax on shipping fees?
It turns out that the answer to that question is a bit more complicated than you might think. Before we dive into the lists, there are a few things to keep in mind.
First, and what most online shoppers already know, is that sales tax eligibility usually starts with the buyer's location. This is why big retailers like Amazon can collect sales tax in one state but not in another. Conversely, Walmart must follow the sales tax laws for every state they ship to because they have brick and mortar locations in every state.
But that doesn't mean that a seller is obligated to collect sales tax for your state. And that usually depends on whether or not you live in a state where the retailer also has a physical presence. That presence doesn't have to be a storefront. It can be something as mundane as a warehouse. Technically, you as a consumer and taxpayer are supposed to report untaxed online purchases on your income taxes every year, but the vast majority of taxpayers do not and the IRS doesn't enforce it. However...
Sales tax nexus laws are complicated and constantly evolving. The days of tax-free shopping online are numbered as state sales tax laws are slowly catching up to the internet revolution. States know they're losing a fortune in tax revenue to online sales, and they're scrambling to plug the holes. Well, as much as molasses-slow government bodies can scramble, anyway.
So how does Brad's Deals handle sales tax? When our team of online shopping experts posts a deal, we always make a point of calling out any shipping charges, and we tell you if sales tax is likely to be charged on your purchase. However, we don't talk about specific tax rates, including whether or not your state will charge you sales tax specifically on shipping, because they vary wildly from one state, county and city to the next, not to mention different tax rates for different products, and the alacrity with which they can change.
Our best advice here is to be a savvy online shopper:
- Look for stores offering free shipping.
- Group purchases together to get over free shipping spending thresholds.
- Opt for in-store pickup to avoid shipping charges altogether when you can.
- Know your local tax rates.
- Lastly, check our list below to see if shipping is included in the calculation when you shop online.
States Where Shipping is Taxable:
- District of Columbia
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- South Carolina
- South Dakota
- West Virginia
States Where Shipping is Not Taxable if Separately Stated:
What does "separately stated" mean exactly? The short answer is that if shipping is listed as a separate item on your bill, then it cannot be taxed. Well, mostly. There are exceptions here, too, of course, because sales tax nexus laws are tricky.
- Rhode Island
Shipping can't be taxed if it's listed separately on a bill or invoice, or if the charge can be avoided by a decision or action made by the purchaser. This means that online purchases eligible for in-store pickup should be exempt from sales tax collected on shipping since you can avoid shipping altogether this way.
Talk about complicated... the taxability of shipping in Illinois depends heavily on factors that you, as a consumer, are unlikely to be privy to. For example, if a retailer charges a flat $7.99 shipping fee, but their actual shipping costs for your order are less than that, say $5.50, then the shipping fee is taxable. Which, let's face it is a pretty raw deal for us as consumers since not only are you being charged more than the actual cost of shipping, you're getting hit with a tax on that overcharge on top of it.
What's more, just because shipping is a separate line item on your invoice doesn't mean it's not an inseparable part of the item's cost. If shipping it to you is the only way for you to get it, then Illinois figures the shipping cost is part of the selling price, no matter how the invoice breaks it down.
Finally, there is some thought that sellers may not have to charge sales tax if they offer an in-store pickup option, but it's really not at all clear. Let's just say "maybe, or maybe not" for now, since Illinois still has a long way to go to clear things up.
Shipping is not taxable if listed separately, but handling is taxable. So when you have a combined shipping and handling charge, shipping becomes taxable.
Like Maryland, shipping fees are not taxable if handling is listed separately, but is taxable if they're combined.
In general, shipping is not taxable if listed separately from the price of the item. However, if you combine it with a handling fee, it becomes taxable. Many Virginia retailers get around the tax by listing shipping and handling as separate line items.
Yes, that only covers 45 states, so here are the other 5:
Montana, New Hampshire, Delaware, Oregon and Alaska aren't listed anywhere above because the lucky residents of these five states never have to contend with state sales tax anyway - so whether sales tax can be charged on shipping fees is a moot point, which keeps things refreshingly simple for retailers.
This article first appeared in Brad's Deals.