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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience:  15+ years tax preparation and tax advice.
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When is it legal to charge tax on shipping

Resolved Question:

In computing the sales tax due on items to be shipped from California to California, an ebay seller included shipping cost in the calculation. Is that legal if the seller is using the United States Postal Service? Also, the seller provided a shipping discount for multiple purchases. However, the tax was calculated on the pre-discount shipping cost. Many merchants to not charge tax on the shipment but only on the merchandise. Are there rules you can provide? Thank you!
Submitted: 8 years ago.
Category: Tax
Expert:  Wendy Reed replied 8 years ago.

Apparently, in California, shipping on taxable items is not necessarily taxable. ("Handling" is considered a service and is taxable) However, this is subject to the following conditions: You must deliver directly to customer via common or contract carrier or US Mail, invoice must list delivery or shipping charges separately, and charge must not exceed actual cost for delivery to customer.

If the merchant does not keep records that show actual cost of delivery, then sales tax is paid on delivery charge. This allows the merchant the freedom to say "We don't keep detailed records on individual delivery charges". However, if the merchant is charging the sales tax, they are required to remit whatever they collect to the State of California.

You can view the details and different situations in this brochure, from the California Board of Equalization:

http://www.boe.ca.gov/pdf/pub100.pdf

Customer: replied 8 years ago.
Reply to Wendy Rieger's Post: So, even though the shipper is using the United States Postal Service, she will pay the tax collected on the shipping to the state of California? That part confuses me. Or is the USPS now a private company? Also, she is arriving at the tax based on the larger shipping amount before the discounted rate was given, each of which is more than the actual shipping will be as they are very light items. But it sounds like the latter is a very muddy area since a person can get around it by calling the additional amount "handling". The whole thing sounds impossible to regulate anyway.......
Expert:  Wendy Reed replied 8 years ago.

I am not aware that USPS charges sales tax on shipping, as the shipping charge is a postage (similar to buying a stamp, you don't pay sales tax on stamps).

What I meant about paying to CA was that if the shipper is charging sales tax on an order, and not keeping detailed records of separate charges, then they must remit to CA whatever sales tax they collect. They should not be charging customers sales tax on shipping and then pocketing this extra money.

And yes, you are correct, that if the company is charging shipping costs that are more than the actual cost of delivery to the client, the overage is taxable as "handling" charges. A common practice for businesses is to either combine shipping and handling, or say "free shipping" but charge a larger handling fee. It seems as though this merchant is doing something along these lines, and probably considering that lumping your purchases together is handling.

If it makes a large difference, I would ask the company for a refund on the tax on the actual shipping charges, which is what the company paid for deliver fees. You can cite the brochure and the information on shipping charges and "actual cost of delivery not taxable" as state guidelines. If they refuse, you could tactfully tell them that you are going to call the CA board of equalization with this information, just to make sure that their practices are legal.

I wish you the best of luck, and I understand your frustration. It seems as the business owner benefits by keeping "undetailed" records and calling everything handling.

Customer: replied 8 years ago.
Reply to Wendy Rieger's Post: Hi, I think we're getting closer. I added some extraneous comments that steered away from my main question, for which I apologize. I know the USPS does not charge consumers a tax on the stamps they buy (at least I don't think so. if they do, it's not shown as such when they are purchased which I think would be illegal, so they probably don't). So, if the postage itself is not taxed and the delivery service occuring by reason of using that postage is already included in the postage, isn't it illegal for the merchant to add a tax to it? Also, since the merchant is charging California state sales' tax on USPS delivery service, who would the merchant remit those funds to anyway? In researching this, I found that it is legal for a merchant to charge shipping when they use private carriers and I guess the taxing gets trickier with interstate commerce, but I couldn't find an answer regarding a tax on U.S.P.S. shipping, which I thought would be simple and clear cut. Logically, I know that it's not kosher, but I would like to find out where it is set out definitively. Thank you!
Expert:  Wendy Reed replied 8 years ago.

I think that the regulations in the brochure pretty much cover how the merchant can charge sales tax on the shipping without it being illegal. If you have read the regulations and still feel that what the merchant is doing is illegal, I strongly recommend that you call the franchise board.

Usually, for interstate commerce, the merchant does not charge sales tax because the customer is not physically buying the product in the other state, and the customer is responsible for his or her own state's use tax on the imported item. This is just a general situation, as certain states do charge sales tax when shipping to certain other states; I'm sure that you've seen this on websites.

If your question is Does the USPS charge sales tax on its own delivery service, then I am 90% sure that they don't, but if you would like to wait I will call the USPS myself to verify this on Monday.

My understanding of the CA regulations is that if tax is charged on shipping along with the product and the handling (in other words, the whole ball of wax), then the entire amount of sales tax charged is paid to CA. Remember it is state sales tax, not sales tax charged for the United States Post Office.

You may also wish to post any "legal" questions on the legal site of Just Answer. Although laws regarding taxes are generally a tax issue, the legal experts may be able to quote certain statutes or have a different perspective on the matter. I sincerely XXXXX XXXXX I haven't been able to give you the exact answer you need---but I believe that what the merchant is doing is not illegal if he or she is not keeping a detailed record of individual shipping charges. I still recommend that you challenge the merchant with your findings and ask them why you are being charged sales tax on shipping if the shipping is a separately stated charge, and shouldn't you at least be able to get a refund of the tax on the shipping charge for the actual cost of delivery?

Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and 2 other Tax Specialists are ready to help you

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