Sales tax on shipping charges is a tricky issue for tax professionals because states’ treatment of the tax varies widely. In Illinois, this issue was the subject of a class action lawsuit against the retailer Walmart. As we pointed out in our recent article, when the Illinois Supreme Court ruled in favor of Walmart in 2009, a situation was created that sparked many qui tam, or whistleblower, lawsuits over the taxation of shipping charges.
Some states tax shipping charges without condition, including New York and Texas, but almost half of the states do not tax shipping charges depending on certain conditions.
Let’s look at Illinois again. Illinois does not charge sales tax on shipping if charges are separately contracted and stated. That distinction is the crux of the Walmart’s defense in the class action lawsuit.
Other states do not tax shipping charges if additional, and sometimes critical, conditions apply. Massachusetts’ exclusions apply if several conditions are met. Charges:
In Maine, sales tax on shipping charges are excluded if they are separately stated, the shipment is made direct to the purchaser, and a common carrier is used.
We have developed a helpful chart that highlights the states’ treatment of sales and use tax on shipping charges for your reference. 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.
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