An Online Seller's Guide to Sales Tax and Shipping in the U.S.

Mar 13, 2017 by Mark Faggiano, TaxJar
An Online Seller's Guide to Sales Tax and Shipping in the U.S.
Posted Mar 13, 2017 by Mark Faggiano, TaxJar

By now you’ve probably wrapped your hands around the concept of sales tax in your online business. And if you haven’t, no worries! Just check out 5 Steps to Sales Tax Compliance for Ecwid Merchants.

But one thing that can throw e-commerce sellers for a loop is sales tax on shipping charges. In many states, if you charge your buyer a shipping charge to ship them a product, then that charge is considered a part of the sale and is also taxable.

Before I go any further, let’s look at a real-world example of how this works for online sellers.

Taxable shipping example:

Laura operates her e-commerce business in Michigan, a state where shipping is taxable. She sells a $80 pair of sunglasses to a buyer in Ypsilanti, Michigan where the sales tax rate is 6%. She also charges $2 for shipping. In this case, the entire $82 would be taxable at the 6% rate. So Laura’s customer would be charged a total of $86.92 for the purchase. (That’s $82 plus $4.92 in sales tax.)

Non-taxable shipping example:

Using the same example, let’s say Laura is based in Iowa, where shipping is not taxable. She sells the same $80 pair of sunglasses and charges the same $2 on shipping. The sales tax rate is still 6%. But since shipping is not taxable, she only charges the 6% sales tax rate on the $80 price of the sunglasses. In this case, Laura’s customer would be charged a total of $86.80 for the purchase. That’s $80 for the sunglasses, plus $4.80 in sales tax, plus the $2 for the shipping charge.

Long story short, in some states online sellers are required to charge sales tax on shipping charges and in other states, they are not.

Sales Tax and Shipping Basics for Online Sellers

Important to note: Use this post as a general guideline. Your specific situation may vary considerably. If you have questions about how sales tax on shipping applies to your particular business, we suggest contacting either your state’s department of revenue or a sales tax expert.

The most important rule of thumb to remember about sales tax in the U.S. is that every state is different.

As an online seller, you may have sales tax nexus (i.e. you’re required to charge sales tax) in two states. While your business and products may be identical in both states, you may have to abide by very different sales tax laws. Keep that in mind as your read on!

Sales tax laws were written with brick and mortar businesses in mind. If you look at a cross-section of state sales tax laws, you’ll quickly notice that most of them are written expressly for brick and mortar businesses.

As e-commerce has gained steam, some states have clarified their stances about sales tax and shipping, but not every state is there yet. For example, you might find that many states refer to shipping as “freight.” If you need clarity on a sales tax law, don’t be afraid to ask the state.

Shipping is not taxable “if clearly stated on the invoice” in many states. In other words, if you lump the sale price of the item and shipping charges all together in one line item, then shipping is taxable. But if you let your buyer know how much of the sale went to shipping charges then those charges aren’t taxable.

In some states, some categories of products are not taxable. For example, clothing is not taxable in Pennsylvania and groceries are not taxable in Ohio. As a general rule, if you ship a non-taxable item (like groceries or clothing) to a buyer, then you are also not required to charge sales tax on the shipping charge.

However, if you are shipping a mixed shipment — say a non-taxable pack of cricket flour and a taxable book — then you would be required to charge sales tax on the portion of the shipping charge used to ship the taxable item. Depending on your state, you can generally divide up the shipping cost by using either the weight of the item or the price of the item.

I know that’s a little confusing, so here’s an example:

You ship a $10 non-taxable pack of cricket flour and a $20 taxable book to a buyer. You charge the customer $3 for shipping. To divvy up how much sales tax collected, you can determine based on price that it cost you $2 to ship the book and $1 to ship the cricket flour. Since only the book is taxable, you’d only charge sales tax on the $2 shipping charges for the book. (Complicated, I know!)

Avoid dealing with shipping taxability by offering free shipping. You generally do not have to worry about sales tax on shipping charges if you offer free shipping to your customers. You would, of course, still be required to charge sales tax on any taxable products you sell.

You can find a list of states where shipping is taxable and non-taxable here. Be sure to check out each state’s sales tax laws, or contact your state’s department of revenue or a vetted sales tax expert should you have specific questions about collecting sales tax on shipping!

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TaxJar is a service that makes sales tax reporting and filing simple for more than 7,000 online sellers.  Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!

About The Author
Author Mark Faggiano is Founder and CEO of TaxJar. This post is geared toward sellers who live in the U.S. or who are required to collect sales tax in the U.S.

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