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Why Is Shopify Charging Me Tax On Shipping?

Why Is Shopify Charging Me Tax On Shipping?

In this article, you will learn:

  1. What Is Shopify Shipping Tax?
  2. Why Is Shopify Charging Me Tax On Shipping?
  3. Which States Affect Shopify Tax On Shipping?
  4. How To Charge Tax On Shipping Rates In Shopify?

Shopify tax on shipping is something that is not controlled by Shopify. Shopify is charging you Shopify shipping tax because of the states, countries, or counties you are selling goods in and the various sales tax laws governing these regions.

Many Shopify merchants like you face the question of whether they should charge tax on Shopify shipping rates or ‘Why is Shopify charging me tax on Shipping?’

Charging tax on shipping depends on the regions or states goods are sold in and the sales tax laws of states where merchants are selling goods.

Once the retailers establish a nexus with various states, they are obligated to charge sales tax on the price of goods they sell to customers as per the sales tax laws of the states they are selling in. Some states also require merchants reaching Nexus to charge tax on the cost of shipping.

Shipping is the cost of transporting goods to customers. Deciding on what shipping strategy (flat rate, free, or carrier-calculated shipping) to follow is in the hands of the Shopify merchant.

The shipping strategy a merchant adopts impacts both his profit margins and cart conversion rate. However, whether to charge tax on shipping rates in Shopify and how much tax to charge are things that are decided by the regions the sales are made in and the sales tax laws of those counties, states, and regions.

In this article, we will let you know what Shopify shipping tax is, why Shopify charges tax on shipping, the various states where shipping is taxable, and how you can charge tax on shipping using the ‘Charge Tax on Shipping Rates’ Shopify feature.

What Is Shopify Shipping Tax?

Shipping cost is an important part of sales through your Shopify store. It is the cost of transporting goods to customers post the sales of such goods.

Shipping tax is the tax charged on the cost of transporting goods to your customers and not the price of goods to be transported. Let’s take an example to understand tax on shipping in Shopify.

Say you sell a product priced at $100 to a customer in Colorado and pay a shipping charge of $10. The tax on shipping will be charged on the ‘shipping cost of $10’ and not on the price portion of $100 of the product.

As mentioned earlier, whether you as a Shopify merchant need to charge tax on shipping depends on the region you are selling goods to and the region-specific sales tax laws.

If you are selling to regions where the shipping cost is taxable, you can charge tax on shipping using the ‘Charge Tax On Shipping Rates’ feature. We have discussed this feature later in the article.

Read: How To Handle Shopify Tax On Shipping?

Why Is Shopify Charging Me Tax On Shipping?

As mentioned earlier, it’s not Shopify that is responsible for charging tax on shipping. If you are being charged tax on shipping, it could be because of the following reasons.

A. Nexus With A State/County/Region

As a sales tax merchant, you will be obligated to register with a state’s sales tax authority and collect sales tax from customers if you establish/reach a nexus with that state.

A nexus is a connection that you as a Shopify merchant have with a state’s sales tax authority. Such a connection is established based on factors like selling goods or services in a state via physical presence such as through a store, warehouse, office, etc, undertaking sales in the state via an agent, or selling a defined number or amount of goods in a state in a particular year from outside the state.

How nexus is defined varies from state to state. Further, you could be in a physical or economic nexus with a state.

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i. What Is Physical Nexus?

You are in a physical nexus with a state if you are doing business by maintaining a physical location. Additionally, you may not have a physical location but still be taken as having a physical nexus if you are doing business in that state via a representative or through an advertisement.

Now, what constitutes tangible personal property, taxable services, having a physical presence, and doing business in a state varies from state to state. Each state has its definition of physical nexus.

For instance, a retailer is in a physical nexus with Colorado if a retailer is:

  • doing business in Colorado and engaged in selling, leasing, or delivering tangible personal property or taxable services
  • doing business in Colorado but not maintaining a physical place of business. However, he is selling goods/services to customers in Colorado via:
    • direct or indirect representatives or an agent
    • distributing catalogs or other advertising materials
    • any other communication media
    • newspaper, radio, or any other advertising material

Further, a retailer is also required to charge tax on the shipping cost of shipping goods to Colorado. The tax on shipping rules in Colorado are described later in this article.

ii. What Is Economic Nexus?

Economic nexus refers to a retailer’s connection with a state’s sales tax authority based on the number of units sold or the amount of goods sold in that state.

He may not have a physical presence in the state but still be obligated to register with the state’s sales tax authority and charge sales tax from customers. This is because he has crossed the threshold of sales in units or the amount set by the state that obligates the retailer to register with the state’s sales tax authority and collect sales tax on goods sold to the customers in the state.

For instance, a retailer is in an economic nexus with Colorado if:

  • his retail sales in the current calendar year in Colorado cross $100,000

Accordingly, if you are in a nexus with states where shipping costs are taxable, you will be charged tax on the cost of shipping.

B. Regional Sales Tax Laws

If you establish a physical or economic nexus with a state as a retailer, you are obligated to register with the state’s sales tax authority and obtain a sales tax ID. The sales tax ID of a state gives you the authority to charge sales tax on the goods sold to customers in that state.

Typically, you are required to charge sales tax on the price of goods sold to the customers. However, as per the sales tax laws of certain states, tax is charged even on the cost of shipping goods to the customers.

Therefore, it is important to check with the sales tax laws of the states to know if shipping costs are taxable. In the section below, we have discussed the states where the sales tax laws influence whether shipping costs are taxable.

Want to know how Shopify sales tax works?

Read:

Which States Affect Shopify Tax On Shipping?

If you are registered in the following states and obligated to charge sales tax from customers, you may also have to charge tax on shipping in Shopify. Using the ‘Charge Tax on Shipping Rates’ feature in Shopify, you can charge tax on shipping in Shopify.

The following are the states where the shipping cost is taxable and their respective sales tax laws about tax on shipping.

1. California

Do You Pay California Sales Tax On Shipping?

As per California sales tax laws, delivery, handling, and shipping charges may be taxable in certain cases. A caveat while applying sales tax to delivery-related charges is as follows:

  • If sales are not taxable, delivery-related charges are also not taxable
  • If sales are taxable, delivery-related charges may be fully, partially, or non-taxable.

Let’s have a look at the situations in which shipping, handling, and delivery charges are taxable in California.

a. Cases Where Shipping/Delivery Charges Are Not Taxable For Taxable Sales Only

All of the following conditions must apply for the delivery-related charges to be non-taxable (for taxable sales only):

  • The seller ships the tangible personal property directly to the buyer via common or contract carrier or through the US mail
  • The freight, shipping, delivery, or postage are stated separately in the invoice.
  • The delivery charge is not more than the actual delivery cost to the buyer.

However, the delivery cost will be taxable if the seller doesn’t maintain records that showcase the actual cost of delivery.

Additionally, if the sales tax is calculated on cost plus a nontaxable delivery charge, the tax collected on such a nontaxable delivery charge must be refunded to the buyer or paid to the California Department of Tax and Fee Administration.

b. Cases Where Shipping/Delivery Charges Are Partially Taxable

The shipping charges are partially taxable when:

  • The seller ships the property directly to the buyer via a common or contract carrier or through the US mail.
  • The delivery cost charged to the buyer is more than the actual cost of delivery
  • The seller records must showcase the actual cost of delivery.
  • Also, such a delivery cost should be separately stated as a line item on the invoice.

If all of the above conditions are met, the portion of the delivery charge that is greater than the actual cost of delivery is taxable.

Further, if you as a seller make a combined charge for ‘Shipping and Handling’ or ‘Postage and Handling’ the handling portion of the charges is taxable. The ‘Shipping’ portion may be subject to sales tax.

c. Cases Where Shipping/Delivery Charges Are Taxable

The shipping or delivery charge is taxable in California if the seller:

  1. does not maintain a record that shows the actual cost of delivery
  2. delivers tangible personal property using his vehicles. However, the delivery charge on the property may not be taxable if the title of such a property is transferred to the buyer before delivery.
  3. separately states charges such as surcharge, handling, etc
  4. include the delivery cost in the price of each unit of the item sold
  5. the cost of shipping charged to the customer is the cost of shipping the property to the seller’s place of business
  6. makes a sale for the delivered price. In other words, the sale agreement mentions that the delivery charge is included in the price, whether stated separately as a line item, included in the cost of the item, or listed as freight prepaid.

Read:
California Sales Tax 2023 For Business: A Complete Guide
How To Apply For Seller Permit California?

2. Colorado

Do You Pay Sales Tax On Shipping In Colorado?

Colorado sales tax laws claim the following when it comes to charging sales tax on the shipping cost.

  • If the delivery cost is separable from the purchase and is stated separately on the invoice, it is not subject to tax. A delivery charge is treated as separable from the purchase when it meets all of the following conditions:
    • such a service is provided after the property has been offered for sale by the seller
    • seller permits the buyer to use the seller’s transportation services or any other alternative such as the buyer picking up the property from the seller’s location
  • Likewise, taxable delivery charges on the sale of exempt goods are not subject to tax as they are treated as part of exempt goods.

Read:
Colorado Sales Tax 2023 For Businesses: A Complete Guide
How To Apply For a Colorado Sales Tax License?

3. Florida

As per Florida sales tax laws, ‘Transportation Charges’ include freight, carrying, handling, delivery, pickup, shipping, and similar other costs.

Do You Pay Sales Tax On Shipping In Florida?

The following rules apply when it comes to charging sales tax on shipping in Florida:

1. The transportation/shipping charges are taxable if they are not separately specified on the invoice but are included in the sale price of the tangible personal property sold.

2. The transportation/shipping charges are taxable in cases where the seller agrees to deliver goods to a specific place and the buyer cannot avoid the delivery cost charged for the transportation services. This is even when the shipping charges are specified separately on the invoice by the seller.

For example, A sells oxygen cylinders to medical facilities like hospitals, veterinary clinics, doctors’ offices, care homes, etc. B agrees to buy 100 oxygen cylinders for his care home in Florida. A would need a delivery fee of $5 per cylinder and will not allow B to either pick up or have the cylinders picked up by a third party for delivery to his care home. Since delivery charges are required by A (seller) and B does not have an option, such a delivery charge will be taxable even if it is specified separately on the invoice.

3. Shipping tax is not taxable in Florida in case the following two criteria are fulfilled:

a. The tax on shipping is stated separately on the invoice

b. Such shipping charges can be avoided by an action or decision on the buyer’s end.

For example, let’s say P is in the car-renting business. Q agrees to take a car on rent from P. P allows his customers to either take the rented car from his place of business or pay transportation charges of $15 for the rented car to be delivered to their designated place. Now, since $15 transportation charges are something that Q (buyer) could avoid by simply deciding to pick up the rented car on his own, such delivery charges are not taxable. This is even though they are separately stated on the invoice.

4. If the seller agrees to sell tangible personal property F.O.B. origin and the title to such property passes to the buyer at the point of origin. In such a case, since the delivery is arranged by the seller to provide the property to the buyer, the delivery cost is not taxable.

5. If the buyer chooses to contract with the third-party carrier for transportation of the personal property, such a delivery cost is not subject to tax.

Read: Florida Sales Tax 2023 For Businesses: A Complete Guide

4. Illinois

According to the Illinois sales tax laws, outgoing transportation and delivery charges include but are not limited to, charges for freight, mail, express, truck, or other carrier, conveyance or delivery charges, and shipping and handling.

Does Illinois Have Sales Tax On Shipping?

Yes, shipping and handling charges are taxable in a retail sale in Illinois if the:

a. shipping and handling charges are not separately identified to the customer on the invoice

b. shipping and handling charges are separately identified to the customer on the invoice. However, the merchant does not offer the customer the option to purchase goods in any other manner except by adding the shipping charges to the selling price of goods purchased by the customer.

To know more about how shipping and handling charges are taxed in Illinois, read the laws for the ‘Transportation and Delivery Charges in Illinois’.

Read: Illinois Sales Tax 2023 For Businesses: A Complete Guide

5. Louisiana

In Louisiana, delivery, freight, and shipping cost is typically stated as a separate line item on the invoices for the tangible personal property sold by the merchants to the customers.

One of the frequent challenges that retailers selling in Louisiana face is whether such charges need to be included in the cost or the selling price of the tangible personal property and be taxed. Let’s have a look at whether the shipping cost is part of the cost or the selling price and whether it is taxable in Louisiana.

Is Shipping Taxable In Louisiana?

a. Delivering Tangible Personal Property From Place Of Sale To Buyer’s Designated Place

i. If the delivery of the tangible personal property is provided from the place of sales (seller) to the buyer’s designated place and charges of delivery are included in the sales price and are not separately stated in the invoice, sales tax is charged on the complete sales price that is inclusive of the delivery charge.

ii. The sales tax is not collected on the shipping/transportation charges if the seller has separately invoiced the buyer for shipping charges to transport tangible personal property from the place of sale to the buyer’s designated location.

iii. Likewise, a seller will generally sell the tangible personal property at his place of sale like a store, loading dock, or warehouse at the agreed price. If the purchaser desires to get the property shipped to his designated location, the shipping charge is for transporting the property from where the sale took place to the buyer’s designated place. Such a separately stated shipping charge for transporting the property from the place of sale whether by the seller’s vehicle or by a common carrier is not subject to sales tax.

iv. Additionally, the delivery/shipping charges are to be excluded from the sale price of the property even though such a property is sold at the place of sale in cases where these shipping charges are optional and can be avoided by some action on the part of the buyer. Such actions could include a buyer picking up the property on his own from the place of sale or having his carrier or agent pick up the property from the place of sale and transporting the same to his designated location.

However, if the seller won’t allow the buyer to avoid delivery charges by adopting the ways mentioned above, delivery charges will be treated as an inseparable component of the sales price of the property. Accordingly, such delivery charges would be subject to tax.

b. Transporting Tangible personal Property To The Place of Sale

There can be cases where the seller agrees to sell tangible personal property to the buyer that is not available for immediate delivery.

In other words, the seller will have to place the order with the wholesaler and ask the wholesaler to either deliver the property to the seller’s place of sale or directly to the buyer’s designated location.

Typically, the seller is responsible to the buyer for any action on the part of the wholesaler or any public carrier for safe transportation of the property either to the seller’s place of sale or the buyer’s designated location. If the seller chooses to separately specify the transportation cost in the selling price of the property, such a delivery expense is inseparable from the sale price. In other words, the sale price inclusive of the delivery cost is subject to sales tax.

Read: Louisiana Sales Tax 2023 For Businesses: A Complete Guide

6. Maine

Is Shipping Taxable In Maine?

As per the Maine sales tax laws, the shipping cost is not subject to sales tax if all the of the following conditions are fulfilled:
The tangible personal property is shipped directly to the buyer
Such a shipment is made via a common or contract carrier or through the US mail
The shipping charges are stated separately from the cost of the tangible personal property and any other charges like the handling fees.

However, certain delivery charges are included in the sale price of the tangible personal property and are subject to sales tax. For example, a Cash On Delivery (COD) cost comprises the service of collecting payment from the customer. Accordingly, all the costs such as handling, fuel, waiting charge, mileage charge, etc are part of the sale price of the tangible personal property. Therefore, all these costs would be included in the sale price and such a sale price inclusive of these delivery charges would be subject to sales tax. This is irrespective of whether such delivery charges are stated separately or not.

Read: Maine Sales Tax 2023 For Businesses: A Complete Guide

7. Maryland

Maryland sales tax law states that a delivery, freight, or transportation service for delivery of tangible personal property directly to the buyer by the seller or any other person acting on the seller’s behalf is not subject to sales tax. However, delivery costs will be taxable if the transportation service is taxable.

Read: Maryland Sales Tax 2023 For Businesses: A Complete Guide

How To Charge Tax On Shipping Rates In Shopify?

Let’s say you are selling merchandise to customers in any of the above-mentioned states where you need to charge tax on shipping. In such a case, you can make changes to the ‘Charge Tax On Shipping Rates’ settings in your Shopify admin.
Follow the below-mentioned steps to make changes to the ‘Charge Tax On Shipping Rates’ settings:

1. Log in to your Shopify Admin and go to ‘Settings’.

Why Is Shopify Charging Me Tax On Shipping?

2. Next, click on ‘Taxes And Duties’.

Why Is Shopify Charging Me Tax On Shipping?

3. Finally, scroll down, and under the ‘Decide How Tax Is Charged’ section check the ‘Charge Tax On Shipping Rates’ checkbox.

Why Is Shopify Charging Me Tax On Shipping?

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