Shipping Charges Taxable?

Freight charges always seem to be a thorn in the side of tax professionals. They're usually too small to worry about on an individual transaction basis, but they can loom large in sample audits where just a few errors in a sample can translate to huge assessments when extrapolated to a population.

Separately Stated

The sales/use tax treatment of shipping charges varies all over the board with lots of little conditions. Almost half of the states do not tax shipping charges depending on certain factors. One major factor is whether the shipping charge is separately stated. In fact, according to our research, in AZ, ID, MD, UT and VA, as long as the charge is separately stated, it is not included in the taxable sale amount and that's the only condition.

Other Conditions

There are additional states that do not tax shipping charges and require the charges to be separately stated, but also have other conditions. Included in that list are: AL, CA, DC, FL, IA, LA, ME, MA, MI, MO, NV, WI. BUT, keep in mind that even in those states, there are other (IMPORTANT, EVEN CRITICAL) conditions that apply. You'll want to see our chart for the details. For example, in Alabama, shipping charges are not taxable if (1) charges are separately stated and paid by the purchaser, and (2) delivery is by common carrier or the U.S. Postal Service. And in AL, transportation charges are not "separate and identifiable" if included with other charges and billed as "shipping and handling" or "postage and handling." In WI, the shipping charges are not taxed, if (1) charges are separately stated and (2) delivery occurs after the sale. Charges are excluded when billed by a third party transportation company, if buyer contracts with the third party company for transportation of the property.

Usually Needs Research

As you can see, it can be a little tricky. In some states, shipping charges are just flat taxable regardless of how they are stated, who paid for them, whether they occur before or after the sale, etc. In other states, just separately state them, and the shipping charges are not taxable. In most states, there are certain conditions that apply and they can be convoluted. Research is usually necessary. Feel free to email us to view a chart (posted by permission from and with credit to CCH) which is current as of 7/16/2009. Please remember that these charts are general in nature. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source.

Sales Tax Rate Changes Announced For: AL, IL, KS & NY

Monday, July 13, 2009 - NEW YORK CITY

New York City --Multiple Taxes: Senate Passes Combined Reporting, Sales Tax Rate Increase Bills

The New York Senate has passed A.B. 8615, A.B. 8866, and A.B. 8867, which contain a variety of New York City sales tax, corporation tax, and unincorporated business tax provisions that are part of a revenue package that was passed by the Assembly on June 16, 2009.

If signed, A.B. 8866 would do the following:

-- increase the New York City sales tax rate from 4% to 4.5%;

-- repeal the exemption for purchases of clothing items priced at $110 or more; and

-- apply the full New York City sales tax to electric and natural gas customers purchasing energy from non-utility companies.

Under A.B. 8615, a credit reducing the unincorporated business tax would apply if the annual tax amount is less than $5,400. The credit would completely offset unincorporated business tax amounts of $3,400 or less.

Among other changes, A.B. 8867 would phase in a single sales factor and generally require related corporations with substantial intercorporate transactions to file a combined report, regardless of the transfer price for such intercorporate transactions.

The text of the bills is available at http://assembly.state.ny.us/leg/?bn=a8615 for A.B. 8615, http://assembly.state.ny.us/leg/?bn=a8866 for A.B. 8866, and http://assembly.state.ny.us/leg/?bn=a8867 for A.B. 8867.

A.B. 8615, A.B. 8866, and A.B. 8867, as passed by the New York Senate on July 9, 2009

Tuesday, July 14, 2009 - ALABAMA

Alabama --Sales and Use Tax: New Local Tax Levy and Rate Changes Announced

The Alabama Department of Revenue has announced the following new local sales and use tax levy and rate changes.

The city of Adamsville began levying a local sales and use tax in its police jurisdiction, effective July 1, 2009. The rates for general items, admissions to places of amusement and entertainment, and retail sales of food for human consumption sold through vending machines are 3.5%. The rates for machines, machinery, and equipment used in planting, cultivating, and harvesting farm products, and machines used in manufacturing tangible personal property are 1.5%. The rate on the net difference paid for all automotive vehicles, truck trailers, semi-trailers, and house trailers is 1%.

The town of Hackleburg increased its general sales and use tax rate, rates on admissions to places of amusement and entertainment, and retail sales of food for human consumption sold through vending machines from 1% to 2%, effective July 1, 2009. The rates on machines, machinery, and equipment used in planting, cultivating, and harvesting farm products; machines used in manufacturing tangible personal property; and the net difference paid for all automotive vehicles, truck trailers, semi-trailers, and house trailers remains at 0.50%.

The city of Hamilton increased its lodgings tax rate from 2% to 7%, effective June 1, 2009.

Notices of these changes were first posted by the department on July 13, 2009, and can be found on the department's Web site at http://www.ador.state.al.us/salestax/ratechanges.htm.

Local Tax Notices, Alabama Department of Revenue, July 13, 2009

Wednesday, July 15, 2009 - ILLINOIS & KANSAS

Illinois --Sales and Use Tax: Rate on Candy, Hygiene Products, and Certain Drinks Increased

Beginning September 1, 2009, candy, grooming and hygiene products, and certain soft drinks will no longer be eligible for the 1% reduced state rate allowed for qualifying food, medicines, and drugs and instead will be subject to the full 6.25% state rate for purposes of Illinois retailers' occupation (sales) tax, service occupation tax, use tax, and service use tax.

The rate increases were imposed by H.B. 255 as part of a $31 billion public works program to renovate roads, bridges, and schools. S.B. 349 changed the effective date of the rate increases from August 1, 2009, to September 1, 2009. The bills also increase motor vehicle license fees and alcoholic beverage tax rates and impose a new video gaming tax.

Candy

"Food for human consumption that is to be consumed off the premises where it is sold" (which qualifies for the reduced rate) will not include candy, effective September 1, 2009. A new provision defines "candy" as a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. However, "candy" does not include any preparation that contains flour or requires refrigeration.

In addition, candy sold through a vending machine is not considered food for human consumption that is to be consumed off the premises where it is sold, effective July 1, 2009.

Soft Drinks

Beginning September 1, 2009, "soft drinks" (which are ineligible for the reduced rate) will be defined as non-alcoholic beverages that contain natural or artificial sweeteners. However, "soft drinks" will not include beverages that contain milk or milk products, soy, rice or similar milk substitutes, or greater than 50% of vegetable or fruit juice by volume.

Prior to September 1, 2009, "soft drinks" are defined as any complete, finished, ready-to-use, non-alcoholic drink, whether carbonated or not, including soda water, cola, fruit juice, vegetable juice, carbonated water, and all other preparations commonly known as soft drinks that are contained in any closed or sealed bottle, can, carton, or container, regardless of size. However, "soft drinks" do not include coffee, tea, non-carbonated water, infant formula, milk or milk products as defined in the Grade A Pasteurized Milk and Milk Products Act, or drinks containing 50% or more natural fruit or vegetable juice.

Grooming and Hygiene Products

"Nonprescription medicines and drugs" (which qualify for the reduced rate) will not include grooming and hygiene products, effective September 1, 2009. The term "grooming and hygiene products" includes soaps and cleaning solutions, shampoo, toothpaste, mouthwash, antiperspirants, and sun tan lotions and screens, unless those products are available by prescription only, regardless of whether the products meet the definition of "over-the-counter-drugs."

The term "over-the-counter-drug" means a drug for human use that contains a label that identifies the product as a drug as required by 21 C.F.R. §201.66. The over-the-counter-drug label includes (1) a "Drug Facts" panel or (2) a statement of active ingredient(s) with a list of those ingredients contained in the compound, substance, or preparation.

P.A. 96-34 (H.B. 255) and P.A. 96-38 (S.B. 349) , Laws 2009, effective as noted

Kansas --Sales and Use Tax: Local Rate Changes Announced

The following local sales and use tax rate changes take effect throughout Kansas on October 1, 2009.

City Rate Changes

• La Cygne increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.
• Le Roy increases its rate 1%, increasing its total tax rate from 5.3% to 6.3%.
• Manhattan (Pottawatomie County) increases its rate 0.25%, increasing its total tax rate from 7.3% to 7.55%.
• Manhattan (Riley County) increases its rate 0.25%, increasing its total tax rate from 7.3% to 7.55%.
• McPherson increases its rate 0.5%, increasing its total tax rate from 6.8% to 7.3%.
• Meade increases its rate 0.5%, increasing its total tax rate from 6.8% to 7.3%.
• Neodesha increases its rate 1%, increasing its total tax rate from 7.3% to 8.3%.
• Neosho Rapids increases its rate 1%, increasing its total tax rate from 6.8% to 7.8%.
• Sterling increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.
• Topeka increases its rate 0.5%, increasing its total tax rate from 7.45% to 7.95%.
• Washington increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.-- Willard (Shawnee County) increases its rate 0.75%, increasing its total tax rate from 6.45% to 7.2%.
• Willard (Wabaunsee County) increases its rate 0.75%, increasing its total tax rate from 6.8% to 7.55%.
• Wilmore increases its rate 1%, increasing its total tax rate from 5.3% to 6.3%.

County Rate Changes

Finney County increases its rate 0.25% from 0.90% to 1.15%, increasing its total tax rate from 6.2% to 6.45%. As a result, the total tax rates for the following cities within Finney County increase as follows:

• From 7.2% to 7.45%: Garden City.
• From 6.7% to 6.95%: Holcomb.

Graham County increases its rate 1% from 0.25% to 1.25%, increasing its total tax rate from 5.55% to 6.55%. As a result, the total tax rates for the following cities within Graham County increase as follows:

• From 5.55% to 6.55%: Bogue.
• From 6.55% to 7.55%: Hill City and Morland.

Sheridan County increases its rate 1% from 1% to 2%, increasing its total tax rate from 6.3% to 7.3%. As a result, the total tax rates for the following cities within Sheridan County increase from 6.3% to 7.3%: Hoxie and Selden.

Special Taxing Jurisdictions

The total tax rates for the following transportation development districts (TDDs) increase 0.5% from 7.55% to 8.05%:

• Manhattan Marketplace TDD
• Manhattan (Riley County) TDD
• Manhattan (Pottawatomie County) TDD

The city of Kansas City creates the following three transportation developments districts with the following rates:

• Plaza at the Speedway #1 TDD will impose a 0.6% transportation district sales tax within the district, and the district's total tax rate will be 8.15%.
• Plaza at the Speedway #2 TDD will impose a 0.4% transportation district sales tax within the district, and the district's total tax rate will be 8.55%.
• Plaza at the Speedway #3 TDD will impose a 0.6% transportation district sales tax within the district, and the district's total tax rate will be 8.15%.

The Kansas City Waterpark Village STAR Bond Project begins. The tax rate in the Waterpark Village (also known as the Schlitterbahn Waterpark) will be 7.55%.

The city of Lansing creates the Lansing Town Center TDD. A 1% transportation district sales tax will be levied in the district, and the district's total tax rate will be 8.3%.

The city of Lawrence creates the Oread TDD. A 1% transportation district sales tax will be levied in the district, and the district's total tax rate will be 8.85%.

The city of Merriam ceases imposing the 1% transportation district sales tax in the Merriam Pointe Transportation District. As a result, the total tax rate in the district will decrease from 8.775% to 7.775% and the jurisdiction code changes from MERTD to MERJO.

The city of Overland Park deactivates the Corbin Park TDD. The district will resume October 1, 2010. For the one year of deactivation, the jurisdiction code changes temporarily from OVET3 to OVEJO.

State and Local Sales/Use Tax Rate Changes, Kansas Department of Revenue, July 13, 2009

Thursday, July 16, 2009 - ALABAMA

Alabama --Sales and Use Tax: Town of Livingston Imposed Local Rental Tax

The Alabama Department of Revenue has announced that the town of Livingston levied a local rental tax on the lease or rental of tangible personal property and linens at the rate of 3%, and a tax on automotive vehicle rentals at the rate of 1%, effective December 1, 2008. Notice of the new rental tax was first announced by the department on July 15, 2009.

Local Tax Notice, Alabama Department of Revenue, July 15, 2009

Friday, July 17, 2009 - NO CHANGES

New York City --Sales and Use Tax: Rate Increase, Repeal of Certain Exemptions Enacted

Legislation has been enacted that increases the New York City sales tax rate from 4% to 4.5%, effective August 1, 2009. It also increases the tax rate on credit rating and reporting services, and on beauty, barbering, and certain other personal services from 4% to 4.5%, and provides that the taxes on these services can only be imposed through November 30, 2011, unless they are renewed. Previously, these taxes could only be imposed through December 31, 2011.

In addition, the legislation repeals the New York City sales tax exemption for purchases of clothing items priced at $110 or more (the exemption for clothing and footwear costing under $110 is maintained) and applies the full New York City sales tax to the transmission and distribution of electric and natural gas service, even when the electricity or natural gas service is purchased separately from the transmission and distribution service.

Ch. 200 (A.B. 8866), Laws 2009, effective August 1, 2009

Sales Tax Rate Changes Announced For: AZ, DE, IN, OK & WA

Monday July 6, 2009 - SEE BELOW

Arizona --Sales and Use Tax: Local Tax Rate Changes Announced

The Arizona Department of Revenue has announced that effective July 3, 2009, Marana will increase the rate of taxation for the transient lodging add tax to 6% (previously, 3%). Additionally, effective August 1, 2009, Thatcher will increase the rate of taxation for the food tax to 2% (previously, 1.5%).

Effective June 1, 2009, Wickenburg increased its transaction privilege tax for all classifications to 2.2% (previously, 1.7%). The April 2009 edition of Transaction Privilege Tax Changes and News issued by the Arizona Department of Revenue stated that all classifications were subject to the new rate. The Department's latest announcement makes a correction stating that the increased rate is for all classifications except the rental occupancy tax.

Transaction Privilege Tax Changes and News, Arizona Department of Revenue, June 2009

Indiana --Sales and Use Tax: Gasoline Prepayment Rate Decreased

The Indiana prepaid sales tax rate for gasoline will be 8.9 cents per gallon for the period of July 1, 2009, through December 31, 2009. The first payment at the new rate is due July 27, 2009. The notice can be viewed on the department's Web site at http://www.in.gov/dor/4059.htm.

Notification to Gasoline Distributors, Indiana Department of Revenue, June 30, 2009

Oklahoma --Sales and Use Tax: Local Rate Changes Announced

The following local sales and use tax rate changes take effect in Oklahoma on October 1, 2009:

-- The city of Muskogee increases its sales and use tax rate from 3.5% to 4%.

-- The city of Talequah increases its sales and use tax rate from 2% to 2.5%.

-- Ellis County imposes a new use tax at a rate of 2%.

-- Washington County increases its sales tax rate from 0.5% to 1%.

-- Washita County increases its sales and use tax rate from 1.25% to 1.875%.

Rates and Codes for Sales, Use, and Lodging Tax, Oklahoma Tax Commission, July 1, 2009

Tuesday, July 7, 2009 - NO RATE CHANGES ANNOUNCED

Wednesday, July 8, 2009 - NO RATE CHANGES ANNOUNCED

Thursday, July 9, 2009 - SEE BELOW

Delaware --Sales and Use Tax: Correction: Rate Change Enacted

Effective for taxable years beginning after December 31, 2009, the Delaware gross receipts tax rate applicable to manufacturers is 0.1944%. The rate increase sunsets effective for taxable periods beginning after December 31, 2013. A previous story incorrectly stated the new rate.

H.B. 289, Laws 2009

Washington --Sales and Use, Business and Occupation Taxes: Decreased Solar Energy System Rate, Semiconductor Incentives Explained

The Washington Department of Revenue has released a notice explaining the change to the business and occupation (B&O) tax rate for manufacturers of solar energy system components and the sales and use tax exemption for gases and chemicals used in making semiconductor materials. Beginning October 1, 2009, the B&O tax rate is decreased from 0.2904% to 0.275% for manufacturing of solar energy systems using photovoltaic modules, and on manufacturing of solar grade silicon, silicon solar wafers, silicon solar cells, thin film solar devices, or compound semiconductor solar wafers used exclusively in components of solar energy systems. The lower rate also applies to wholesale sales of such solar energy systems and components. The lower rate expires June 30, 2014.

Effective July 1, 2009, the sales and use tax exemptions for sales of gasses and chemicals used in semiconductor materials include gasses and chemicals used to produce silicon solar wafers, silicon solar cells, thin film solar devices, and compound semiconductor solar wafers. These exemptions expire December 1, 2018.

Special Notice, Washington Department of Revenue, July 2, 2009

Friday, July 10, 2009 - NO RATE CHANGES ANNOUNCED

Finally Some Good News for Manufacturers

These days, when it comes to sales/use taxes, good news is hard to come by. So many states are increasing taxes and rolling back exemptions and stepping up audit enforcement. A quick perusal of the headlines provides all the proof. New York, North Carolina, California and others are taking the position that merely having otherwise unrelated people sign up as affiliates in those states means that Amazon.com (and other similarly situated companies) have nexus in those states. That's what you call aggressive.


Meanwhile, New Jersey, Illinois, California and many other states are increasing taxes and letting exemptions expire.

News is pretty bad no matter where you look. And if we polled our subscribers on which state would be the worst for bad news, then Louisiana would surely rank high up on that list. But Louisiana, has come out with some great news for manufacturers.

Louisiana had been phasing in an exemption for certain manufacturing machinery and equipment. The exemption was to have been fully phased in by July 1, 2010. The good news is that by virtue of Act 12 of the 2nd Extraordinary Legislative Session of 2008, the last segment of the phase-in made the exclusion fully effective on July 1, 2009. The exclusions are from the state sales, use, lease, and rental tax for machinery and equipment used by eligible manufacturers in plant facilities predominantly and directly in the actual manufacturing for agricultural purposes or in the actual manufacturing of tangible personal property that is for sale to another.

The LA Department of Revenue has published an Information Bulletin (No. 09-016) with some answers to questions that might arise.

Is this Exemption Good in the Parishes as well?

The legislation authorizes political subdivisions of the state to provide these exclusions from local sales, use, lease, and rental taxes but does not require that they do so. If you have a specific parish question, ask us and we'll do the research for you.

What is Manufacturing "Machinery and Equipment"?

"Machinery and equipment" is defined by R.S. 47:301(3)(i)(ii)(aa) as tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part in the manufacturing of tangible personal property for sale. "Machinery and equipment" also includes tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part of the production, processing, and storing of food and fiber or of timber.

Specific examples of tangible personal property that this statute categorizes as eligible "machinery and equipment" are computers and software that are an integral part of the machinery and equipment used directly in the manufacturing process; machinery and equipment necessary to control pollution at a plant facility where pollution is produced by the manufacturing operation; machinery or equipment used to test or measure raw materials, the property undergoing manufacturing, or the finished product, when such test or measurement is a necessary part of the manufacturing process; machinery and equipment used by an industrial manufacturing plant to generate electric power for self consumption or cogeneration; and machinery and equipment used to produce news publications whether the news publications are ultimately sold at retail, for resale, or distributed at no cost.

Buildings (usually) Don't Count -- Categorized by the statute act as ineligible for the manufacturing "machinery and equipment" exclusions are a building and its structural components, unless the building or structural component is so closely related to the machinery and equipment that it houses or supports that the building or structural component can be expected to be replaced when the machinery and equipment are replaced; heating, ventilation, and air-conditioning systems, unless their installation is necessary to meet the requirements of the manufacturing process, even though the system may provide incidental comfort to employees or serve, to an insubstantial degree, non-production activities; tangible personal property used to transport raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete; and tangible personal property used to store raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete.

What is a "Manufacturer"?

Here's one of the sticking points. To take advantage of this exemption, your company must be a "manufacturer". The term "manufacturer" is defined in the statute as a person whose principal activity is manufacturing, and who is assigned by the Louisiana Workforce Commission a North American Industry Classification System (NAICS) code within the agricultural, forestry, fishing, and hunting Sector 11; the manufacturing Sectors 31-33; the information sector 511110, all as they existed in 2002, or under industry code 423930 as a recyclable material merchant wholesaler who is engaged in manufacturing activities, which must include shredding facilities. R.S. 47:301(16)(o) additionally defines the term manufacturer to include a person regulated by the Louisiana Public Service Commission or the Council of the City of New Orleans who is assigned a NAICS code 22111. This 22111 NAICS code applies to electric power generation businesses.

Persons whose principal activity is manufacturing, but who are not required to register with the Louisiana Workforce Commission for purposes of unemployment insurance, can apply to the Louisiana Department of Revenue to be classified as a "manufacturers" under NAICS sectors 11, 31-33, or 511110 for purposes of this sales tax exclusion. The department will determine from income tax data whether applicant would have been so classified had the applicant been required to register with the Louisiana Workforce Commission.

What is a "Plant Facility" and What is Meant by "Predominantly and Directly" in the Actual "Manufacturing Process"?

The term "plant facility" is defined as "a facility, at one or more locations, in which manufacturing referred to in sectors 11 and 31-33 of the North American Industry Classification System of 2002, of a product of tangible personal property takes place." "Used directly" means used in the actual process of manufacturing or manufacturing for agricultural purposes.

"Manufacturing for agricultural purposes," means the production, processing, and storing of food and fiber and the production, processing, and storing of timber.

"Manufacturing", the statute provides, means putting raw materials through a series of steps that brings about a change in their composition or physical nature in order to make a new and different item of tangible personal property that will be sold to another. The statute provides that manufacturing begins at the point at which raw materials reach the first machine or piece of equipment involved in changing the form of the material and ends at the point at which manufacturing has altered the material to its completed form. Placing materials into containers, packages, or wrapping in which they are sold to the ultimate consumer is part of this manufacturing process.

For purposes of the sales tax exclusions, manufacturing does not include repackaging or redistributing; the cooking or preparing of food products by a retailer in the regular course of retail trade; the storage of tangible personal property; the delivery of tangible personal property to or from the plant; the delivery of tangible personal property to or from storage within the plant; and actions such as sorting, packing, or shrink wrapping the final material for ease or transporting and shipping.

What About Other States?

We put together a chart using our resources with CCH to show you the current status of the manufacturing exemptions in some of the top states. That chart is reproduced below. If you'd like more detail about those states, or in other states, just let us know and we can help you with that.