Taxes are mandatory fees imposed by the government on property, individual income and business profits, and they are added to the cost of certain goods or services. As a business owner, you face many taxes — the most common of which is sales tax. A sales tax is “a retail point-of-purchase tax imposed by state and local governments that is paid by the purchaser for goods and services,” according to The U.S. Small Business Administration.
All but five U.S. states (Alaska, Delaware, Montana, New Hampshire and Oregon) charge sales tax, according to The Balance. So, this should be pretty straightforward, right? Wrong. Despite state-level laws, local governments can also require some retail businesses to charge a sales tax.
As if this wasn’t complicated enough, the rules around taxes get even stickier when an e-commerce business gets thrown into the mix, which brings up a commonly asked question: Is shipping taxable?
There is a combination of factors that ultimately determine whether you should apply a tax on shipping. Ask these three questions to ensure that you’re following the correct laws and regulations:
If the state your business is based in requires tax on shipping, then it’s safe to assume you should always apply a tax on shipping. If you fail to collect a shipping tax, you may be forced to pay a large sum of money to cover the taxes you should have been collecting, plus interest fees or late fees.
We know what you’re thinking: What happens if you’re shipping to a customer outside of your state? This is when things start to get complicated.
When shipping to customers in other states, it can be unclear whether collecting a sales tax on shipping is required. First, you must determine if you qualify for a sales tax nexus, meaning you have some sort of physical presence in a state. A physical presence could be an office, a warehouse, an inventory storage facility or even an employee or an affiliate. Even a temporary physical business, such as a trade show or fair, could qualify.
Next, determine whether the state you’re located in is an origin- or destination-based state. Most states are destination-based, meaning that if a purchase is shipped to another state, you must charge taxes corresponding to the final destination. Origin-based states follow their own laws around shipping taxes, regardless of where the item is being shipped.
Believe it or not, how you itemize shipping costs convolutes shipping tax even more. In some states, if shipping is listed separately from the price of the goods, it is not taxable. However, if shipping is lumped into the cost of the items purchased, it’s subject to tax.
Other states require a shipment tax regardless of whether it’s listed separately or lumped into the item price. To complicate things further, certain states require a tax if other charges are included with shipping, such as “shipping and handling.” However, there are some states — like California — that do not typically tax shipping costs but will apply a tax to “handling” only.
It’s important that you understand when you are required to charge a shipping tax to ensure that your business is abiding by the law and not risking a major financial hit in the future. Ultimately, you’ll want to check with your local and state laws for specific details regarding shipping tax laws.
If you’re just starting a business, it’s best to determine each scenario that would require a shipping tax so that you can set up clean business practices from day one. For existing business owners, there’s no time like the present to step back and assess your practices to ensure that you’re compliant with the law.
Does your state require tax on shipping? What if you ship to another state? Tell us about the laws of shipping tax in your state; you may help a fellow business owner along the way!