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State Tax Law – Sales and Use Tax Application to Transportation Charges PDF Print E-mail
Written by Oren Cohen   
Thursday, 14 April 2011 04:41

Have you been charging sales tax on full retail price? if you did you may be over charging your customers for sales tax and pay more than you owe. the state of California Board of equalization, publication 100, section 1628 provides exclusion to charges for shipping and delivery. Following some basic requirement and keeping adequate record, will enable you to exclude those charges from the amount subject to sale tax.

in cases of retail sales, tax doesn't apply to separately stated charges for shipping and delivery from the retailer's place of business, or third party location in cases of a drop ship transaction, to the consumer. One restriction is that the retailer cannot deliver the goods directly to the customer by himself. in order to enjoy the exclusion the retailer must use independent third party common carrier or United states mail. For the purpose of this exclusion the place where the sale took place and title passes to the customer will be disregarded, except when the price provided is "delivered price" and the customer is not responsible for the delivery charges. in addition, the amount excluded from sales tax cannot exceed the actual cost of the transportation to the retailer.

to be considered "separately stated", the cost of the delivery must be separately indicated in the sale contract, invoice, receipt or any document that reflect the agreement between seller and buyer. transportation charges combined with handling of the shipment is considered a "separately stated" item, but only the portion representing the actual cost of postage or delivery may be excluded from the sales tax., the handling portion of the sale both if stated separately as "Handling" or when combined with the shipping, is not a transportation charge and is not excluded from the sales tax.

transportation charges from the manufacture, vendor or any supplier of the retailer for shipments shipped directly to the consumer are drop ship transactions protected by section 1628. But when the goods are shipped first to the retailer and only then to the consumer, the transportation charges from the vendor to the retailer are part of cost of goods sold, "freight in," and are taxable as part of the product cost sold by the retailer. as mentioned before transportation charges on items sold under "delivered price" conditions are included for sales tax. Property is sold for a delivered price when the purchaser have a set price for the items and he doesn't care as for how much will the transportation cost. the price is final and all transportation charges will be covered by the seller. even in case the transportation charges are physically stated separately they are regarded as not. the seller has the risk on the product until the product safely arrives to the buyer and any additional charge or credit for the shipping will apply to the seller account not the buyer.

transportation charges facilitated by the retailer are normally included for sales tax but if the following three conditions are met they can be excluded from sales tax as well. the first two are the one from the general standard which require that the transportation charges be separately stated, and the shipment has to go from the retailer or third party directly to the purchaser. the third requirement is that the transportation occurs after the sale of the property to the purchaser already took place. so, as long as the sale occurs before the transportation take place and the first two requirements are met, the tax doesn't apply to the separately stated charges for transportation.

Even when all conditions are met the deduction can be disallowed if the record keeping is not sufficient. in case of failure to keep some or all of those records showing the actual cost of an individual shipment, tax will apply to the entire delivery amount as long as it is in connection with a taxable retail sale. in this case liability for the tax may become payable even that it wasn't collected. the fact that the tax is not levied on the business to pay, but only to collect doesn't excuse it from the liability to pay just because it was not collected.

One additional criterion that is very easy to overlook is that the requirement for record keeping is for individual delivery and not as a whole. it is not sufficient to keep the total bill from the third party common carrier and to have it available upon audit; the record of each separate transaction must be kept in connection with each individual sale. in cases where a business charge a standard flat or percentage amount of shipping to its customers instead of the actual amount of shipping, and don't track the actual cost of the shipment when charging the customers, the full amount charged for shipping and delivery is taxable.

For further information you may want to contact your tax adviser or refer to the Board of equalization Publication 100, section 1628, shipping and delivery charges. the sale and use tax law and regulations are complex and subject to change.

The Bookstein Institute and Tax Clinic, California State University, Northridge 18111 Nordhoff Street, Northridge, CA 91330-8372