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6 With the Internet as a framework for expanding into
new markets and reaching new customers, multistate
commerce has become a reality for traditional Dzbrick
and mortardz stores. This has raised many issues in the
area of tax compliance.
6 One area, that is commonly overlooked is the
Taxability of charges for shipping items purchased,
commonly referred to as freight or transportation
charges.
 Y


6 The density of tracking the various tax rules is time
consuming and an error in misinterpreting the sales
tax rules could lead to significant audit exposure.
6 Therefore, a few crucial areas should be examined
carefully when addressing the issue of sales tax on
freight Ȃ who bears risk of loss, who is paying the
freight charges and the method of invoicing.
 ›


6 Title transfer and risk of loss are often overlooked
when determining the taxability of freight charges.
6 Freight is calculated based on volume base, Service
Value base, or Sales Value base.
6 In a sales contract, the terms should be very clearly
defined as to when the transfer of title occurs.
6 When sales contracts or invoices are silent regarding
shipping terms, the transaction may be reviewed
under audit.
 ›


6 nless the contract terms are clearly defined auditors
are likely to make this an audit issue, assuming freight
is included in the definition of price.
6 In case the sale contact is unclear, vendors will be
required to provide documentation of the shipping
contract or face having the transaction included in the
assessment.
 ›


6 For example, in Nevada FOB destination is taxable and
FOB origin is non-taxable.
6 Based on the silent nature of the sales contract If
Nevada is conducting an audit, the auditors may
determine that title transferred when risk transferred.
6 Therefore, freight charges for the entire audit period
would be taxable. However, the company could have
been FOB origin in the contract, in which FOB origin
would not be taxable in Nevada. In that case, title
transfer takes on a whole new meaning based on the
terminology used in the sales contract.
 À





 
6 Únother factor to consider is the actual payment of the
freight charges. Generally, if customers are paying for
the freight charges, title will pass from the vendor to
the common carrier on receipt of goods by the
common carrier. This is true even though the customer
is paying for the freight and the vendor retains control
until the very end of the delivery process.
 À





 
6 For example, a vendor shipping a unit FOB origin can
contact the common carrier right up until delivery to
the customer and request that the unit not be
delivered.
6 The following illustrations show when title transfers
based on the terms of sale.
¦










¦. Buyer pays freight charge
2. Buyer bears risk
3. Buyer has ownership in transit
4. Buyer files claim if goods are lost or damaged in transit.

Title transfers to
Buyer

Common Carrier

Buyer
Seller
ë











¦. Seller pays freight charge
2. Buyer bears risk
3. Buyer has ownership in transit
4. Buyer files claim if goods are lost or damaged in transit.

Title transfers to
Buyer

Common Carrier

Buyer
Seller












¦. Buyer pays freight charge
2. Seller bears risk
3. Seller has ownership in transit
4. Seller files claim if goods are lost or damaged in transit.

Seller hold Title

until transfers to
Buyer

Common Carrier

Buyer
Seller













¦. Seller pays freight charge
2. Seller bears risk
3. Seller has ownership in transit
4. Seller files claim if goods are lost or damaged in transit.

Seller hold Title

until transfers to
Buyer

Common Carrier

Buyer
Seller
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6 The taxability of freight also depends on the invoicing
method. Nontaxable freight charges must be
separately stated on the invoice. If a nontaxable freight
charge is bundled with other taxable charges on the
invoice, it is subject to tax. The matrix in the next few
slides provides guidance regarding the taxability of
separately stated freight charges.
 




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Úlabama Non taxable Non taxable
Úrizona Non taxable Non taxable
Úrkansas Taxable Taxable
California Non taxable Non taxable
Colorado Non taxable Non taxable
Connecticut Taxable Taxable
District of Columbia Non taxable Taxable
 




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Florida Non taxable Non taxable
Georgia Taxable Taxable
Hawaii Taxable Taxable
Idaho Non taxable Non taxable
Illinois Non taxable Non taxable
Indiana Taxable Taxable
Iowa Non taxable Non taxable
 




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Mansas Taxable Taxable
Mentucky Taxable Taxable
Louisiana Non taxable Non taxable
Maine Non taxable Non taxable
Maryland Non taxable Non taxable
Massachusetts Non taxable Non taxable
Michigan Taxable Non taxable
 




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Minnesota Taxable Taxable
Mississippi Taxable Taxable
Missouri Non taxable Non taxable
Nebraska Taxable Taxable
Nevada Non taxable Taxable
New Jersey Taxable Taxable
New Mexico Taxable Taxable
 




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New York Taxable Taxable
North Carolina Taxable Taxable
North Dakota Taxable Taxable
Ohio Taxable Taxable
Oklahoma Non taxable Non taxable
Pennsylvania Taxable Taxable
Rhode Island Taxable Taxable
 




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South Carolina Non taxable Taxable
South Dakota Taxable Taxable
Tennessee Taxable Taxable
Texas Taxable Taxable
tah Non taxable Non taxable
Vermont Taxable Taxable
Virginia Non taxable Non taxable
 




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Washington Taxable Taxable
West Virginia Taxable Taxable
Wisconsin Taxable Taxable
Wyoming Non taxable Non taxable

Source: Sabrix S
product taxability 2009
  
6 The issue of taxability of freight charges can be
problematic and frustrating. The seller should review
the sales contract and determine when title and risk of
loss are being transferred. If the sales contract is silent
on the issues, then the niform Commercial Code
(CC) should be examined to determine when title
transfers. The seller should become familiar with the
various states' requirements. The key to minimizing
audit exposure lies in clearly defined language in the
sales contract and an accurate invoicing method.