California Sales Tax Guide
Chapter 8: Understanding California sales tax rules for shipping & handling
With California being one of the largest and most populous states in the US, most businesses find they have customers in the Golden State. If you’re collecting sales tax from California residents, you will need to consider how to handle taxes on shipping and handling charges. When it comes to sales taxes, California is home to some complicated tax law. Rules for sales tax on the costs of shipping are no exception.Is Shipping Taxable in California?
Like most states (and most everything in the world of sales and use tax), the answer is…it depends. There are a number of factors, scenarios, and situations that impact whether the California Board of Equalization will require you to collect sales tax on shipping and handling. We’ll outline some of those situations below. As is always the case, specific questions on shipping in California and sales tax should be taken directly to a tax professional familiar with California tax laws.The Impact of Invoices
Like most states, shipping is exempt from sales taxes in California, as long as you invoice correctly and keep good records. California wants to be sure that the tax-exempt shipping charges on your invoices are simply a pass-through of what you were charged by the shipper.
The California BOE has a very helpful web page on this topic, including a number of possible scenarios to help you figure out all the possibilities.Be Clear in California
California encourages sellers to use clear language when describing tax-exempt shipping charges on invoices. Put the charges on a separate line, charge customers the exact amount you paid, and use the terms the BOE suggests: “shipping, delivery, freight, or postage.” You should also keep good records of your shipping costs, so you can match them to what you charged your customers if you are ever audited.
When you fill out your California sales and use tax return, you should include the shipping you charged your customers in your total sales figure. Then deduct the shipping charges that are exempt from sales tax on the deduction section, under “Other.”Personal Delivery and Sales Tax
If you like to play mail carrier and drive packages around to your customers, anything you charge them for that service is taxable in California.
There is an exception to this rule that is so confusing that the BOE suggests you contact them if you think it applies to you. To follow the example on the BOE website, an appliance store might deliver purchases using its own delivery trucks. Those charges are subject to sales tax unless there is a sales contract that transfers ownership of the appliance to the customer before the delivery. Then you can charge for delivery and it’s not taxable. Confused yet?Other Complications
Fuel surcharges and lumped-in or flat-rate shipping: If you specify a fuel surcharge or include shipping charges in the price of your goods — as in “delivery included!” — these fees are taxable. Also, if you charge a flat shipping fee — say $10 per order, rather than the exact amount that shipping costs for each order — the difference between your flat fee and the actual shipping cost is taxable.
Shipping and tax-exempt purchases: If you don’t separate out your shipping charges, then the same rules apply to your shipping charges as the rest of the order. If the goods or the customer are exempt from sales taxes, then the shipping is as well.
Handling: Handling charges are subject to sales tax in California. If you lump together a shipping and handling charge on your invoice, you need to pay sales taxes on the handling portion of the charge, which will be anything above the actual amount you paid to ship the order to the customer.
Freight in vs. freight out: California makes a distinction between freight in, which is what you pay to have goods or materials shipped to you, and freight out, which is what you pay to ship to your customers. Freight in charges are subject to sales tax, even if you add them as a separate item on your invoices and keep great records of the actual costs. Freight out charges are non-taxable, under the circumstances outlined above.Dreaming of California Shipping
A spokesperson for the BOE summed up what you need to remember about California’s rules for sales taxes on shipping like this: “Sellers of tangible personal property should make sure they are charging tax on handling charges and when the shipment is made using the seller’s own truck. When shipping costs more than the product, they must make sure to remit tax for [the] marked-up amount.”