By now you’ve probably figured out the concept of sales tax in your online business. And if you haven’t, don’t worry! Just check out 5 steps to sales tax compliance for Checkout Now merchants.
But one thing that can confuse ecommerce sellers is sales tax on shipping charges. In many states, if you charge your buyer a shipping charge to send them a product, then that charge is considered a part of the sale and is also taxable.
Before we go any further, let’s look at an actual example of how this works for online sellers.
Taxable shipping example:
Laura operates her e-commerce business in Michigan, a state where shipping is taxable. She sells an $80 pair of sunglasses to a buyer in Ypsilanti, Michigan, where the sales tax rate is 6%. You also charge $2 for shipping. In this case, the entire $82 would be subject to the 6% tax rate. So Laura’s customer would have to pay a total of $86.92 for the purchase. (That’s $82 plus $4.92 in sales tax).
Example of tax-free shipping:
Using the same example, let’s say Laura is based in Iowa, where shipping is not taxed. She sells the same $80 pair of sunglasses and charges the same $2 for shipping. The sales tax rate is still 6%. But since shipping is not taxable, she only charges 6% sales tax on the $80 price of the sunglasses. In this case, Laura’s customer would have to pay a total of $86.80 for the purchase. That’s $80 for the sunglasses, plus $4.80 sales tax, plus the $2 shipping and handling.
Long story short, in some states online sellers are required to charge sales tax on shipping charges and in other states, they are not.
Sales tax and shipping basics for online sellers.
Important: Use this article as a general guide. Your specific situation may vary considerably. If you have questions about how sales tax on shipments applies to your particular business, we suggest you contact your state’s revenue department or a sales tax expert.
The most important rule of thumb to remember about sales tax in the U.S. is that every state is different.
As an online seller, you may have sales tax nexus (i.e., be required to collect sales tax) in two states. Even if your business and products are identical in both states, you may have to comply with very different sales tax laws. Keep this in mind as you read on.
The sales tax laws were written with traditional businesses in mind. If you look at a sampling of state sales tax laws, you will quickly notice that most of them are written expressly for traditional businesses.
As e-commerce has gained traction, some states have clarified their positions on sales tax and shipping, but not all states have reached that point. For example, many states may refer to shipping as “freight.” If you need clarification on a sales tax law, don’t be afraid to ask the state.
In many states, shipping charges are not taxable “if clearly stated on the invoice.” In other words, if you bundle the item’s selling price and shipping charges into one line item, the shipping is taxable. But if you let your buyer know what part of the sale went to shipping charges, then those charges are not taxable.
In some states, some categories of products are not subject to tax. For example, clothing is not taxable in Pennsylvania and food is not taxable in Ohio. As a general rule, if you ship a non-taxable item (such as groceries or clothing) to a buyer, then you are also not required to collect sales tax on the shipping charge.
However, if you ship a mixed shipment-for example, a package of cricket flour that is not taxable and a book that is taxable-you will have to charge sales tax on the portion of the shipping charge used to ship the taxable item. Depending on your state, you can generally split the shipping charges using either the weight of the item or the price of the item.
I know it’s a little confusing, so here’s an example:
You ship a $10 non-taxable package of cricket flour and a $20 taxable book to a buyer. You charge the customer $3 for shipping. To apportion the sales tax collected, you can determine, based on the price, that it cost you $2 to ship the book and $1 to ship the cricket flour. Since only the book is taxable, you will only collect sales tax on the $2 of shipping the book. (Complicated, I know!)
Avoid having to deal with shipping taxation by offering free shipping. Generally, you don’t have to worry about sales tax on shipping charges if you offer free shipping to your customers. Of course, you will need to collect sales tax on any taxable products you sell.
You can find a list of states where shipping is taxable and non-taxable here. Be sure to check each state’s sales tax laws, or contact your state’s revenue department or a sales tax expert if you have specific questions about collecting sales tax on shipping.
TaxJar is a service that simplifies sales tax reporting for over 7,000 online sellers. Try TaxJar today for free for 30 days and take the headaches out of sales tax compliance.