It is easy to ignore the sales tax consequences of shipping, freight, & packaging because such charges are often an afterthought. However, each state treats shipping, freight, and packaging differently. The result is that multistate businesses may be paying tax when they don’t need to, or alternatively may not be paying tax when they should. Even small dollar amounts can add up to substantial sums over an audit or refund period, so it is vital for taxpayers to educate themselves on the sales tax treatment of their shipping, freight, and packaging in the states in which they do business. This article will generally address how five of the biggest states treat shipping, freight, and packaging for tax purposes. Those states are California, Florida, Illinois, New York, and Texas.
California generally exempts from sales tax delivery, freight, and transportation of property when (1) the charges are separately stated and (2) the transportation is not provided by the retailer. However, in circumstances where the transportation is provided by the retailer, the transportation may still be exempt when certain conditions are met.
Generally, containers, wrapping materials, bags, cans, twine, gummed tape, barrels, bottles, boxes cartons, sacks, pallets, and materials from which such containers are manufactured are exempt in California from sales and use tax. California has additional exemptions for sellers of food products for human consumption.
Additionally, some packaging may be exempt for resale. For example, if you are a manufacturer of gift cards which are sold in a package for display in a store, that display package may be purchased exempt for resale if the customer is in fact purchasing not only the cards but also the packaging in which the cards come. Other circumstances exist in which customers are purchasing packaging material itself for resale, in which case the packing materials are likely exempt.
In Florida, separately states shipping charges are also exempt. However, it is required that (1) they are imposed at the option of the purchaser and (2) are incidental to the sale of tangible personal property. The exemption includes carrying, delivery, freight, handling, pickup, shipping, and other similar charges or fees.
Aside from delivery, some items are exempt in Florida, even when not separately stated. Items that “accompany a product,” without which the delivery of the tangible personal property would be impracticable, are exempt even when there is no separate charge for them.
Like California, Florida has additional exemptions for sellers of food products. Specifically, salt & ice are exempt from tax when purchased by the seller of perishable food.
Finally, Florida offers 0% sales tax rates to unique zip codes where licensed freight forwarders immediately export items from the state. In short, if an out-of-state customer orders an item that is shipped to the freight forwarder for immediate export, that sale should be exempt for export. However, often for practical reasons, when an item is purchased online and shipped to the freight forwarder’s address, the online website will impose the sales tax rate of that zip code because it does not know the destination is a freight forwarder who will export the item. As a result, for practical purposes, Florida has allowed for a 0% sales tax rate to be assigned to unique zip codes where freight forwarders operate.
Illinois takes a unique approach to the taxability of shipping, freight, and packaging. Specifically, Illinois divides transportation of tangible personal property between incoming and outgoing. Incoming transportation is taxable, while outgoing is generally exempt. Outgoing transportation is exempt unless there is an “inseparable link” between the sale of property and its delivery. Illinois finds an inseparable link exists when it is not separately stated, or it is separately stated but it is a required charge.
However, actual business practices don’t necessarily follow that exact pattern. Therefore, when an invoice contains a lump sum delivery charge for separately listed items, Illinois finds that the lump sum delivery charge is not taxable when the selling price of the items for which delivery is nontaxable is greater than the selling price of the items for which delivery is taxable. Finally, Illinois offers a safe harbor, exempting delivery charges where the customer chooses the delivery in a method offered by the seller.
In New York, the taxability of shipping is dependent upon the taxability of the item being shipped. Shipping or delivery that a seller includes on its invoice is taxable if the product or service that is being shipped or delivered is taxable. Meanwhile, if the item being delivered is nontaxable or exempt, the delivery is also exempt.
Like Illinois, New York addresses mixed transactions. If the charge or shipping or delivery is fairly allocated, then only the shipping or delivery charge allocated to the taxable products is taxable. New York addresses other unique delivery circumstances as well. Delivery is not taxable when customers arrange for the transportation, and the customer must be charged for the delivery on a separate invoice.
Regarding packaging materials, cartons, containers, wrapping and packing materials, and supplies and components, for use by a vendor in packaging or packing tangible personal property for sale are exempt when actually transferred by the vendor to the purchaser. In addition, when the purchaser transfers cartons, containers, and other packaging materials to a customer in connection with the performance of certain taxable services, those materials are also exempt as a purchase for resale. Examples of such services include: information services; certain processing and printing services; installation, maintenance and repair services upon tangible personal property; real estate maintenance, service or repair.
Like New York, the taxability of delivery depends on the taxability of the underlying tangible personal property or services. The fact of whether the delivery is separately stated is irrelevant in Texas for the determination if taxability of delivery.
Internal and external wrapping, packing, and packaging used in wrapping, packing, or packaging tangible personal property or in the performance of a service for the purpose of furthering the sale of the tangible personal property or the service is taxable. However, packaging supplies purchased for resale “as is,” not part of a packaged product, are eligible for the resale exemption. One narrow application of Texas sales and use tax is that wrapping and packaging sold to a laundry or dry cleaner for packaging pressed items is exempt.
Regarding manufacturing, internal and external wrapping, packing, and packaging supplies purchased for a person’s own use, stored for use, or used in wrapping, packing, and packaging tangible personal property may qualify for a manufacturing exemption.
Certain containers are exempt from Texas sales and use tax: (1) containers sold with their contents if no sales tax is imposed on the price of the contents; (2) empty nonreturnable containers sold to persons who fill the containers and sell the containers and contents together; and (3) returnable containers sold with their contents or resold for refilling.
Shipping, freight, and packaging are easy to overlook when considering sales and use tax liabilities. However, most sales of tangible personal property in the modern economy require some sort of transport and packaging materials. Over the course of a refund or audit period, these amounts could result in a substantial sales tax assessment, or, alternatively, an unexpected windfall in the form of a refund. Multistate businesses should consult a state and local tax attorney to identity any potential liabilities or refund opportunities. Generally, there is only a short time period to recover money overpaid to a state, so it is important to act quickly once a potential opportunity has been identified.
Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.
Shipping – An Overlooked Florida Sales Tax Exemption, Published September 12, 2019, by Jeanette Moffa
Overlooked Exemptions – Technology, Published September 10, 2019, by Jeanette Moffa
Technology – Overlooked Florida Sales Tax Exemption, Published September 10, 2019, by Jeanette Moffa
Bad Debts – An Overlooked Sales Tax Exemption, Published August 27, 2019, by Jeanette Moffa
Bad Debts – Florida Sales Tax Exemption, Published August 23, 2019, by Jeanette Moffa
Manufacturing – An Overlooked Sales and Use Tax Exemption, Published August 20, 2019, by Jeanette Moffa
Manufacturing – Florida Sales and Use Tax Exemption, Published August 23, 2019, by Jeanette Moffa