Sales Tax on Shipping Charges, Explained
Getting your products in the hands of your customers can be tricky. There are lots of moving parts between collecting the shipping address and getting the notification that the package has been delivered. Even experienced online retailers can find themselves with questions about how to manage the process efficiently.
Charging for the work it takes to ship products is not unusual. But did you know that in some cases you should also be charging sales tax on your shipping charges? Below, we’ll go over some of the most frequent questions online retailers have about sales tax on shipping costs.
Is Shipping Taxable?
There are two things to remember when it comes to eCommerce sales tax. First, there is no federal sales tax. That’s left to the states, which means that each one gets to make its own rules. Most states charge sales tax but there are some that don’t. Oh, and the District of Columbia–which isn’t a state–wanted to get in on the fun so it also has its own sales tax laws.
The second thing to remember is that most of the sales tax laws that do exist were written before online retail sales even existed. Sometimes the laws don’t make a lot of since in an ecommerce world. Things can get complicated.
Fortunately, TaxJar has a comprehensive state-by-state guide on the taxability of shipping. Just keep in mind that most states that don’t require sales tax on shipping do require the shipping charge to be separated from the other charges on the invoice. Be sure to check on the requirements, even if your state doesn’t require you to collect sales tax. The way your business is set up may change your requirements and responsibilities.
What about Non-Taxable Items?
Some states also designate some items as non-taxable. For example, Arizona exempts groceries from sales tax and Minnesota exempts most clothing. The general rule of thumb is that if the item being sold isn’t taxable, the shipping cost isn’t taxable, either.
Ready for things to get really tricky? Try shipping taxable and nontaxable items in the same order. In those cases, it’s best to ship those items separately so you can easily separate the shipping costs and therefore the taxes on those costs. If you can’t do that, be sure to separate the shipping charges for the items and only charge sales tax on the shipping for the applicable items.
Let’s say you’ve sold a lamp for $100 with a shipping cost of $10. You’ve also sold a shirt for $25 with a shipping cost of $5. You’re subject to Minnesota sales tax so the shirt is exempt but the lamp is not.
In the best case scenario, you should ship the lamp and then ship the shirt, so that the taxable and tax exempt items and costs are clearly separated. But if you can’t, you should invoice the customer for $110 plus sales tax for the lamp. Then you’ll add the $30 for the shirt and its shipping cost to that. And of course, your invoice will clearly state what you charged sales tax on and what you didn’t.
How Do I Collect Sales Tax on Shipping?
The good news is that most of the popular shopping carts and marketplaces available to online retailers have built-in sales tax calculators. You just need to need to set them up with the right state requirements. Here’s are in-depth guides to the sales tax settings for most major shopping carts and marketplaces.
You can also use TaxJar’s Expected Sales Tax Due report, which will give you a snapshot of how much sales tax you should have collected, including tax on shipping costs. You can compare that to how much you’ve actually collected to make sure your business is on the right track.
Hopefully this has demystified the wacky world of sales tax on shipping charges. Have questions or something to say? Start the conversation on Twitter @TaxJar
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!