By: Kayla Kormylo, Staff Accountant
Sales tax continues to be a pain point for most online sellers. The rules have evolved, becoming more complex and they are not consistent from state-to-state. One thing adding to the complexity most don’t think about is sales tax on shipping charges. Almost all states expect shipping and handling to be included in the sales tax calculation.
It’s important to know nexus, or a business connection between the state and seller, isn’t established just because you have sales in a state. There are many rules around what creates nexus or economic nexus in a state such as warehouse locations, employees, the volume of transactions, etc. Once nexus is established, however, it then goes a step further when trying to determine what is taxable and not taxable. The sales price of an item is typically taxable unless it is qualified as an exempt product. If the product is exempt from sales tax, then so is the shipping. If the product is not exempt, then neither is the shipping.
If shipping and handling is included as a separate line item and part of the order cost, almost all states consider it to be a necessity of the sale and therefore, subject to sales tax. What if the sales tax is already included in the price of the product like with fuel or vending machines? Do you need to tax shipping separately? The answer – It depends. This is one area where the states are not unanimous.
The following states believe there should be sales tax on shipping charges, regardless if sales tax is already included in the price or not:
Arkansas Mississippi South Dakota
Connecticut Nebraska Tennessee
Florida New Jersey Texas
Georgia New Mexico Vermont
Hawaii New York Washington
Indiana North Carolina Washington D.C.
Kansas North Dakota West Virginia
Kentucky Ohio Wyoming
Minnesota South Carolina
On the contrary, the states listed below do NOT require sales tax to be charged on shipping if sales tax is already included in the price of the item:
Illinois Rhode Island
Shipping is not taxable in any state if a common carrier is used, the customer pays the carrier directly and shipping charges are listed separately from handling.
Of course, if the buyer has no shipping expense because you’re offering free shipping, or they’re a Prime customer, it’s a mute point. If you have opted-in to collect sales tax through Amazon for a specific state, Amazon will generally calculate sales tax on the total selling price of each item in accordance with state tax laws. Amazon specifies this would generally include item-level shipping and handling charges and an allocation of order-level shipping and handling charges.
We understand sale tax is a very challenging aspect when selling online. We can help. Our services include determining what states you have nexus, assistance in registering , collecting, and remitting sales tax, and assistance with any existing sales tax liability you may have. Please contact us today to learn more.