Freight
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How Do You Avoid Tax on Freight, Delivery & Handling?

Tax on freight generally follows the transaction the freight relates to. If the goods you sell are exempt and you charge your customer for freight or delivery charges or handling charges, then these charges are exempt.

If you sell taxable goods to your customer and also charge the customer for freight, delivery or handling charges, then the charges are considered to be a necessary part or element of the sale and thus are taxable. It should be noted that freight is generally a nontaxable service. It only becomes taxable when you pay for the service and then charge your customer for it as part of the sale. Many states provide conditions under which you may do this and still exempt the tax on the freight charges. So how do you legally avoid tax on freight when your sale is taxable? Generally, you must consider the following conditions:

  1. FOB shipping point - You should permit your customer to pay the freight carrier direct. This almost always exempts the freight from tax. Since this is not always practical, you should ship the goods with freight added to the invoice and follow the next three conditions;
  2. Freight occurs after point of title transfer - Pass the title to your customer before the point where the freight charges in question begin;
  3. Freight is by common carrier - you should not use your own truck. To do so indicates shipping is a necessary part of the sales transaction and this makes the freight taxable in many states;
  4. Show charges for freight separate from everything else - Do not mark it up and do not combine handling charges with freight charges. Most states charge tax on handling charges, so combining them with freight charges (e.g. "S&H") will make both taxable.

Please note that handling charges, markups, and delivery charges using your own vehicles are almost always taxable even when you follow the steps prescribed above. These rules are state specific. As such, each state looks at these conditions differently. Some choose to ignore them altogether and tax all freight charged by you to your customer. Do your research carefully to avoid tax on freight and possible penalties later when charges are found to be taxable.

 

 

Feel free to call or e-mail us to discuss any tax issues you may have.

1.785.876.2426

Sales Tax Advisors, Inc.
9168 Village Lane
Ozawkie, KS 66070-6102

Last modified on Thu Nov 01 2012 18:47:07 MST.
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