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Sales tax in California can be quite tricky. One of the most common questions we get is “When should I charge sales tax on shipping fees?” We’ll explore this with different examples of the types of sales you may have within your business and whether or not shipping charges are taxable to your client.
According to the CDTFA there are many different scenarios in which you should (or shouldn’t) charge sales tax on shipping charges to your client. We’ve outlined these below and what the CDTFA says you should do in regards to charging sales tax on the shipping costs.
Applying Sales Tax to Delivery–Related Charges
|The goods you are selling are not taxable||Related shipping charges are not taxable|
|The goods you are selling are taxable||Delivery–related charges may be nontaxable, partially taxable, or fully taxable. See below|
Delivery–related charge is not taxable when
|You ship directly to the purchaser by common carrier, contract carrier, or US Mail;|
Your invoice clearly lists delivery, shipping, freight, or postage as a separate charge;
The charge is not greater than your actual cost for delivery to customer.
|Exception: Charge is taxable if you do not maintain records that show the actual cost of the delivery|
If the tax amount calculated for the sale was based on the cost of the item plus the nontaxable delivery charge, you must refund the tax amount collected on the delivery or pay that amount to the CDTFA.
Delivery–related charge is partially taxable when (for taxable sales only)
|Your shipping charge to the customer for delivery is greater than your actual shipping cost.||The portion of the delivery charge that is greater than the actual delivery cost is taxable.|
Please note: Your records must show your actual cost of delivery. The delivery charge should be separately stated on the invoice.
Delivery–related charge is taxable when (for taxable sales only)
|You do not keep records that show the actual cost of the delivery.||Example – You charge standard amounts for shipping and do not track the cost of individual deliveries.|
|You make a separately stated charge for fuel surcharge or “handling,” etc.||Separately stated charges, in addition to the actual shipping charges, are generally taxable.|
|You include a delivery charge in the unit price of the item sold.||This would constitute the entire line item to be taxable.|
It’s important in any scenario to keep copies of your vendor invoices or receipts where you are being charged shipping if you are billing the charge back to your client. It’s also important to make sure that your invoices are very clear when it comes to shipping charges. Be sure that your invoices use specific terms such as shipping, delivery, freight, or postage to describe delivery–related charges. If you are charging for handling, which is taxable, be sure to use that term on your invoice. This will help you determine how to apply tax and will make things clearer for your customers. It will also make it easier for everyone if the CDTFA audits your records.
You can also reach out to the CDTFA directly for more information or specific questions regarding sales tax on shipping charges: 1-800-400-7115 or https://www.cdtfa.ca.gov
Have more questions regarding this topic? Please contact us and we will be happy to provide additional support!