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How sales and use apply to shipping and handling

 
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Category : > Article Directory of Sales Tax Registration
Posted On : Thu May 31st,2012

 
In most taxable states shipping and handling charges are part of the sales tax calculation and it is essential to understand how to collect accurate sales and use tax from consumers on taxable items. Every state handles sales tax on shipping and handling differently, therefore it is advised to read sales tax bulletin of the state where business is conducted. This article contains a few standard examples for the understanding, but each sales tax activity treats according to the revenue agency guidelines.
 

In most states when taxable items are sold the vendor include shipping and handling charges in the sales invoice which is generally subject to sales tax.

If a customer decides to pay for a delivery of the taxable item through a third party, then the seller will collect only sales tax on its charge.

Shared few examples below to understand how sales and use tax is collected under different conditions.

Example Number One:

A customer buys a washing machine with a service contract from a merchant who has its own delivery vehicles. The merchant used own truck to bring washing machine at the buyer's place and charged $30.00 for delivery.

The merchant has raised an invoice to buyer in regards to the above shared sales activity.

Washing Machine $400.00

Service Contract $40.00

Delivery Charges $30.00

Gross sales (Excluding Sales Tax)  = $470.00 and sales tax will be calculated on gross revenue which is $470.00.

Example Number Two:

A customer buys furniture from a retail store and asks that the items be delivered. The furniture maker contracts with a common carrier to transport the furniture to the customer’s home. The furniture maker issues a following bill to the customer.

Furniture $5,000.00

Transportation $500.00

Total price $5,500.00 before applying sales and use tax

In this case, the vendor will calculate sales tax on $5,500.00


Example Number Three:

A contractor buys lumber from an agent and request that the lumber will be drop shipped from a supplier who is in the state of Washington to the job site which is in New York and prepaid transportation charges will be included.

The broker issues following invoice.

120 Board Feet $400.00

Prepaid freight charges $100.00

Total amount before tax is $ 500.00

Sales tax is computed on the total charge of $500.00.

 

Example Number Four:

An individual in Albany sends his watch to a jeweler in New York City to be fixed. After being fixed, the watch is shipped back to Albany. The jeweler’s bill lists the charge for the repair service and also a charge for shipping. Sales tax is due on the total amount paid for the taxable repair service, including the shipping and handling charge.

How to handle shipping and handling on Nontaxable products or services?

Shipping and handling is also not subject to collect sales and use tax on non taxable items or if a reseller provided a valid reseller certificate to buy taxable items to resell to the end users.

Example: A buyer buys food items from a merchant. The food merchant adds a shipping and handling charge of the customer’s bill. If all of the products the customer purchased are non taxable food products, the entire charge, including the shipping and handling charge, is exempt from sales tax.

Example: A distributor delivers an inventory shipment to a customer who is engaged in retail sales. The customer provides the distributor with a resale certificate at the time the order is placed. Any freight charge billed by the wholesaler for delivery of this order will be considered not taxable.

Note: When taxable and nontaxable products or services are combined into a single charge on one bill, the entire bill is taxable, including any shipping or delivery charges. Since the sales and use tax is a very complicated and important matter and it is advised to get an advice of a professional before conducting business.

  

Nashib Umer

Author of One Magic Click Optimization


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