Figuring out whether or not freight is taxable can be confusing. Tax laws are complicated and ever-changing, making it difficult to keep up with what’s taxable and what’s not.
Is freight taxable? Freight can be taxable or non-taxable depending upon the goods and services being delivered. If the product or service that is being delivered as freight is taxable, charges for freight that vendor bills are taxed.
Charges for transportation, handling, and mailing also fall under the terms “shipping” and “delivery.”
This article will make things a little bit clearer for you. In it, we break down the basics of freight taxation and provide some examples of when freight is and isn’t taxable.
Is Freight Taxable?
Freight can be taxable, as well as non-taxable. It depends upon the goods and services being delivered. Charges for transportation, handling, and mailing also fall under the terms “shipping” and “delivery.”
There are two methods for sellers to charge freight: on the invoice or bill of sale, or as part of the sale price. If they are listed separately, it is very likely that they will be taxable.
As a general guideline, in many jurisdictions, the following are typical:
- If the goods in the shipment are subject to taxes, you must pay tax on the cost of shipping them.
- If the goods are not taxable, shipping them is typically free.
- If a shipment contains both taxable and tax-free items, the charge is taxed in proportion to the number of taxable goods sold.
However, that is simply the tip of the iceberg because there are always exceptions to every rule when sales tax is concerned. Furthermore, some states have varying regulations for various circumstances.
Calculating Taxes On Freight
Taxable products or services
Any shipping or delivery costs that the seller adds to the invoice are included in the receipt, which is subject to sales tax.
If a customer purchases, sends, and pays for the delivery of a taxable item from a third party, the seller is only responsible for collecting sales tax on its charge.
- Example: A consumer purchases a clothes dryer from a large department store chain. The shop delivers the appliance to the customer’s home and charges $20 for delivery. The following invoice is sent to the client by the business: Appliance$499.95 Service contract30.00 Delivery charge20.00Total (before sales tax)$549.95
Sales tax must be computed on the total charge of $549.95.
- Example: A customer purchases custom furniture from a maker, which agrees to ship it. The furniture is carried by a common carrier to the client’s home as part of the deal between the two parties. The following invoice is sent to the consumer by the maker:
Table and chairs$3,500.00Transportation250.00Total (before sales tax)$3,750.00
The total cost of $3,750 must be taxed.
- Example: A contractor engages a broker to buy wood. The contract stipulates that the timber will be dropped-shipped from a Washington producer’s mill and that transportation charges will be included. The following invoice is sent to the customer by the broker:
1000 board feet of 2×4’s$400.00Prepaid freight100.00Total (before sales tax)$500.00
The total charge of $500.00 must be taxed.
Nontaxable products or services
Any fee to the customer for shipping or delivery is not taxable if the product or service being sold is not subject to tax. This also applies when the client supplies a valid resale certificate or other exemption documents to the seller.
- Example: A consumer purchases smoked meats, various cheeses, and jellies from a mail-order food merchant. The cost of shipping and handling is added to the customer’s account. Since all of the items purchased are non-taxable food items, the entire amount, including the shipping and handling fee, is exempt from tax.
- Example: A wholesaler delivers a shipment of goods to a retail consumer. When you place an order, the client gives you a resale certificate. The fee charged by the wholesaler for this delivery is not taxable.
Sales including both taxable and nontaxable charges
When taxable and nontaxable items or services are combined on one charge on one bill, the entire transaction is taxed, including any delivery or shipping costs.
Sales tax is not collected on the taxable charges if they are listed separately on a bill, because sales tax is only charged on taxable items and services. However:
When there is only one charge for shipping or delivery on the invoice, the entire delivery cost is considered part of the taxable portion of the bill.
If the shipping or delivery costs are fairly distributed between the taxable and nontaxable goods of the invoice, only the shipping or delivery fee allocated to taxable products on the bill is subject to taxation.
- Example: A customer purchases a coffee maker and a five-pound delivery of foreign coffee by mail. The following invoice is sent to the client by the mail-order firm:
Coffee maker$89.95 Five pounds of imported coffee 55.00, Shipping5.00Total (before sales tax)$149.95
$94.95 is the taxable amount (including profits tax).
Delivery-only services
Transportation services are not subject to sales tax. As a result, the fee for the delivery service is not taxable if it is sold separately from the taxable property being carried. To be considered separate, the purchase of the transportation service must have been arranged by the consumer and charged on a second invoice.
- Example: A customer purchases taxable items from a vendor. The customer contracts separately with a common carrier to transport the products from the seller’s location to his or her residence. The buyer receives two bills from the seller: one for the taxable goods and another for the delivery service. Because the bill is only for transportation, it is not taxed.
How To File Freight On Your Federal Taxes?
The current federal tax law relating to overland truck transport by truck includes a tax on diesel fuel, special excise taxes on new freight trucks, tires, and trailers, and an annual heavy-vehicle use tax. Diesel fuel is subject to a low per-gallon fee. There is no existing per-mile federal charge for freight transportation.
A tax of 30 cents per mile would be imposed on freight transportation by heavy-duty trucks (Class 7 and above in the Federal Highway Administration’s classification system) and freight transportation by rail (per railcar). The tax would not apply to truck or railcar miles traveled without goods.
Heavy Highway Vehicle Use Tax
The IRS requires that anyone who owns or is obligated to register a heavy highway vehicle with a taxable gross weight of 55,000 pounds or more in their name at the time of first use on the public roadways during the reporting period submit Form 2290, Heavy Highway Vehicle Use Tax Return.
Filing Deadlines
The filing period for Form 2290 filers is July 1 through June 30. The deadline for submitting Form 2290 is determined by the month you first use your taxable vehicle on public highways throughout the reporting period.
- If you’re using a vehicle for the first time on a public road in July, file Form 2290 between July 1 and August 31.
- For vehicles you first use on a public road after July, the tax for the current filing season will be prorated. By the last day of the month following your vehicle’s first usage on a public roadway, submit Form 2290.
State Taxes On Freight
Each and every state has different regulations for taxes on freight.
California: The majority of shipping costs are relieved if the deal is tax-free, but if the transaction is taxable, delivery charges may be nontaxable, partially taxable, or completely taxed.
Typically, charges for delivery by business vehicle are taxable if the product is taken into ownership after the buyer receives it (FOB destination), but fees are tax-free if the title transfer occurs before delivery of the goods (FOB origin). The first tax is the cost of transporting goods to their final destination, which can be broken down into shipping charges that exceed the true delivery price and those that exceed reasonable market rates.
The cost of transporting goods to their initial destination is generally taxable, but transportation costs that exceed accepted norms are typically exempt. Charges for electronic delivery are usually not taxed.
Florida: When it comes to transportation costs for taxable purchases, they are subject to tax whether separately stated or tacked on to the selling price.
Delivery fees, on the other hand, are usually exempt if they are specified separately and the buyer has the choice of picking up the product or hiring their own third-party transport services. Charges for electronic delivery are typically exempted.
Georgia: Charges for delivery, freight, transportation, shipping, and handling are often considered part of the purchase price and therefore exempt if the sale is taxable. Charges for delivering electronic products are typically exempt.
New York: The goods are generally not tax-free. In particular, shipping, handling, and delivery costs on taxable sales are considered taxable in New York. The third-party delivery charge is exempted if the consumer chooses to have the merchandise delivered by a third party and pays the third party directly. Charges for delivering taxable items are generally subject to sales tax.
Although shipping, delivery, and handling fees for nontaxable transactions are usually prohibited, they can be taxed if the charge for transportation or delivery is separately stated and fairly allocated between taxable and nontaxable sales.
Charges to transmit products through the internet are typically tax-free. Confirm all of the information with the state department of revenue or a competent tax advisor.
Texas: If the sale is taxable, shipping and delivery costs in Texas are taxed. If the transaction is exempt, however, shipping and delivery expenses are not taxed. When a third-party shipper offers separately stated delivery fees on behalf of the consumer, they are also tax-free.
Washington: The charge for delivering taxable items, even if they are not separately stated, or if the vendor is also the carrier, is generally subject to sales tax. However, charges to deliver exempt items are typically exempt.
If a shipment consists of both taxable and exempt items, the proportion of delivery charges due on the taxable goods (determined by sale price or weight) is taxed. When a consumer hires a third party to transport purchased items, delivery fees may be exempted.
Verify the accuracy of any information with the state department of revenue or a competent tax professional.
Conclusion
In the end, freight charges are always determined by what is being delivered. If the product or service is taxable, then the freight charges will be taxed as well. It’s important for businesses to understand these tax laws and how they impact their bottom line so they can make informed decisions when it comes to shipping products and services.