SUMMARY: This Directive is written for taxpayers who purchase goods though orders placed by mail, phone, or fax and have the goods delivered to them via the U.S. mail or a third party carrier. It provides guidance on when separately stated shipping and handling charges are included in the sales price subject to tax. The general rule is that transportation charges associated with the sale and delivery of tangible personal property are excluded from the taxable sales price if the charges are separately stated and the transportation occurs after the retail sale. G.L. c. 64H, § 1.

Under this Directive, separately stated charges described as for "shipping and handling" [1] will be treated as transportation charges excluded from the sales price provided that: (1) the charge reasonably reflects the costs of transportation; (2) the transportation occurs after the customer purchases tangible personal property to be transported; and (3) a written contract or other agreement does not expressly provide for title to the goods to transfer to the purchaser after the transportation has occurred.

The Department previously described the treatment of transportation charges in Directive 96-5. This Directive modifies Directive 96-5 and supersedes it to the extent of any inconsistency between the two.

ISSUES: 1. How is a lump sum shipping and handling charge associated with the sale of tangible personal property treated for purposes of the sales and use tax?

2. When will a shipping and handling charge be treated as occurring after the sale of the tangible personal property purchased and therefore be excluded from the sales price subject to tax?

DIRECTIVES: 1. A lump sum shipping and handling charge associated with the sale of tangible personal property will be treated as a transportation charge for purposes of the sales and use tax if the amount of the charge reasonably reflects the costs of transportation of the goods sold. [2] Whether a charge is reasonable is a question of fact, but charges must generally lie within a range of prevailing charges for similar delivery services. Shipping and handling charges based upon a percentage of the sales price will be considered reasonable provided they lie within such a range.

2. A shipping and handling charge will be treated as occurring after the sale of the tangible personal property purchased if:

a) the shipping and handling charge is separately stated;

b) transportation of the property occurs after the customer pays for, or incurs an obligation to pay for the property, and

c) there is a written contract or agreement of sale respecting the property, where either;

1) the contract of sale is silent on the transfer of title and delivery will be made by a third party carrier; or

2) the contract specifies that title passes to the customer before transportation or delivery of the property purchased.

Shipping and handling charges may not be excluded from the "sales price" subject to tax if the written contract or agreement of sale respecting the property specifies that title to the property purchased will transfer only upon delivery to the customer. [3] The burden of proof with respect to the validity of any transportation charge excluded from the sales price is upon the vendor, who must keep appropriate records of the sale in accordance with 830 CMR 62C.25.1.

DISCUSSION OF LAW:

An excise is imposed upon retail sales in the Commonwealth by any vendor of tangible personal property at the rate of five percent of the vendor's gross receipts from such sales. G.L. c. 64H, § 2. A complementary use tax is imposed upon the storage, use or other consumption in the Commonwealth of tangible personal property purchased from any vendor for such use within the Commonwealth at the rate of five percent of the sales price of the property. G.L. c. 64I, § 2. For purposes of the use tax, it is presumed that tangible personal property sold by any person for delivery in the Commonwealth is sold for storage, use or other consumption in the Commonwealth; the burden of proving the contrary is upon the person who makes the sale. G.L. c. 64I, § 8.

"Gross receipts" is defined as the total sales price received by a vendor as consideration for a retail sale. G.L. c. 64H, § 1; G.L. c. 64I, § 1. When determining the "sales price," no deduction shall be taken on account of the cost of transportation of the property prior to its sale at retail, but separately stated transportation charges are excluded from the sales price, if the transportation occurs after the sale of the property. Id.

The Department will treat a lump sum shipping and handling charge associated with the sale of tangible personal property as a transportation charge for purposes of the sales and use tax, provided that the charge is separately stated and reasonably reflects the costs of transportation. If the transportation of the property occurs after the customer pays for, or incurs an obligation to pay for it, the shipping and handling charges will be not be taxable if the requirements of Directives 1 and 2, above, are met.

This Directive is retroactive in effect. 830 CMR 62C.3.1(6)(f).

EXAMPLES:

1. Andy purchases a computer, ordering it over the phone and giving the sales agent his credit card number. The computer is shipped to Andy by means of a common carrier, and is delivered to his home address. The amount of the shipping and handling charge is separately stated on the invoice and reasonably reflects the cost of transporting the computer. The shipping and handling charge is excluded from the sales price of the computer and is therefore not subject to the sales tax.

2. Brad buys a set of cookware. He places the order at a department store and the property is later delivered to his home by common carrier. The sales invoice states that a shipping and handling charge is included in the total, but the amount of the charge is not separately stated. The entire amount paid for the cookware, including the shipping and handling charge, is subject to tax.

3. Clarice buys an oriental carpet. The cost of the carpet is $1,000 and the invoice includes a separately stated shipping and handling charge of $250. This charge appears excessive when viewed in the light of shipping and handling charges normally prevailing for similar delivery services. The exclusion for shipping and handling charges is therefore disallowed and the entire price charged in the transaction is subject to tax unless the vendor carries the burden of proof in showing that the charges were reasonable.

4. Clarence orders a cookbook from a bookstore. The cookbooks costs $25.00. The store charges $5.00 for shipping and handling, and $2.00 for overnight delivery via a third party carrier, both of which charges are separately stated. The $7.50 in shipping and handling charges are excluded from the sales price. Transportation takes place after the sale, and although the shipping and handling charges are high as a percentage of the sales price of the cookbook, the charges appear reasonable when viewed in the light of shipping and handling charges normally prevailing for similar delivery services.

5. Delia buys a desk. The desk is shipped to Delia's office after the purchase agreement is signed; a separately stated shipping and handling charge also appears on the invoice, which also specifies, however, that title to the desk will not transfer to Delia until after the desk is delivered to her. The shipping and handling charges are included in the sales prices subject to tax -- even if reasonable and separately stated -- because the sales agreement specifies that title to the property purchased will transfer upon delivery to the customer. Transportation thus takes place prior to the sale, not afterward.

6. Eliza buys a lamp in Connecticut from a vendor registered in Massachusetts for use in her Massachusetts home. The sales invoice contains separately stated shipping and handling charges but states that title to the lamp will pass to Eliza when the property is delivered to her in Massachusetts. This is a Massachusetts sale and the vendor must include the shipping and handling charge in the sales price subject to tax. See example 4, above. If the vendor is not registered, Eliza must pay use tax on her purchase.

/s//Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.
Acting Commissioner of Revenue

BFC:DMS:kt

December 23, 1998

DD 98-5



[1] Shipping and handling charges include lump sum charges imposed by a vendor of tangible personal property for shipping, handling, mailing, packing, transportation, or delivery of the tangible personal property sold. "Overnight delivery," "express delivery." and similar charges imposed in addition to regular shipping and handling charges are also transportation charges for purposes of this Directive. Such additional charges must also reasonably reflect the cost.

[2] Separately stated charges for "handling" alone, as opposed to charges for both "handling and shipping," are generally not treated as transportation charges.

[3] If delivery is to be made in the dealer's own truck, shipping and handling charges are excluded from the sales price if the contract specifies that title passes prior to transportation or delivery of the property. However, if in such a case the contract is silent as to when title passes, or if there is no written contract, the shipping and handling charges, even if separately stated, are included in the sales price subject to tax.