I. INTRODUCTION

This Directive announces a change in policy regarding the application of Massachusetts sales tax, G.L. c. 64H, to transportation charges associated with the sale of tangible personal property. Effective September 1, 2004, the Commissioner will not assess sales tax on separately stated transportation charges, as defined below, provided that they meet the requirements set forth in this Directive. The Commissioner's treatment of the taxability of transportation charges does not affect passage of title or other rules determining when or where a sale takes place for any other purpose. Thus, the rules contained in Department of Revenue Out of State Sales and Deliveries regulation, 830 CMR 64H.6.7, and Technical Information Release 01-14 remain unchanged by this Directive, except with respect to transportation charges.

This directive revokes DOR Directive 96-5 in its entirety, and replaces it with the following rules. To the extent this Directive is inconsistent with DOR Directive 98-5 or any other prior public written statements addressing the taxability of transportation charges, this document supersedes and revokes those documents with respect to such charges.

II. DIRECTIVE

ISSUE: How does the Massachusetts sales tax apply to a transportation charge associated with the sale of tangible personal property?

DIRECTIVE: A transportation charge, i.e., a charge by the seller of tangible personal property for preparation and delivery of goods to a location designated by the purchaser is excluded from the sales price subject to tax. Charges for transporting property to the vendor as "freight-in" charges are not "transportation charges" within the meaning of this Directive. Freight-in charges are part of the vendor's overhead and are included in the sales price subject to tax.

III. DISCUSSION

A. General

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 retail sale includes "any transfer of title or possession . . . of tangible personal property . . . by any means whatsoever." G.L. c. 64H, § 1. "Gross receipts" is defined as the total sales price received by a vendor as consideration for a retail sale. G.L. c. 64H, § 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 Commissioner will treat a transportation charge, as defined in this Directive, as nontaxable provided that the following requirements are met: the charge (1) reflects a cost of preparing and moving the goods to a location designated by a retail customer; (2) is separately stated on the invoice to the customer (not merely on the internal books and records of the vendor) and (3) is set in good faith and reasonably reflects the actual costs incurred by the vendor. The time or place of the sale, or the manner of delivery of the property, whether by common carrier or in the vendor's own truck, and passage of title will no longer be considered determinative of whether the transportation charges are subject to sales tax. These factors remain relevant for all other purposes, however. See e.g., Out of State Sales and Deliveries regulation, 830 CMR 64H.6.7; TIR 01-14.

B. Separate Statement Required

Generally, the Commissioner will consider a charge for transportation as "separately stated" if the charge, however designated, is stated as a distinct component of the total amount charged to the customer and reflects a cost of preparing and moving the goods from the vendor to the customer. Separately stated charges may include amounts paid for "postage," "freight," "shipping," "handling," "transportation," "shipping and handling," crating, packing or the like, so long as the charges reflect a cost of preparing and delivering the goods from the retail vendor to a location designated by a retail customer. If so, the charges may be excluded from the sales price subject to tax, so long as they are reasonable, as discussed in Section III C, below. [1] If there are multiple separately stated charges, each is to be evaluated independently. The failure of one charge to meet the requirements set by this Directive does not affect the taxability of others.

C. Reasonable Transportation Charges

A transportation charge must be reasonable. 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. See DOR Letter Ruling 00-15. Transportation charges based upon a percentage of the sales price will be considered reasonable provided they lie within such a range. A lump sum shipping and handling charge is reasonable only if it reflects, more or less, the actual shipping and handling costs incurred in making a delivery. See Letter Ruling 00-15. Thus, a lump sum shipping and handling charge that contains a substantial profit component is not reasonable. Id.

D. Drop shipments

Note that G.L. c. 64H, § 1, provides that the delivery in the Commonwealth of tangible personal property by an owner or former owner thereof, or by factor or agent of such owner, former owner or factor, if the delivery is to a consumer or to a person for redelivery to a consumer, pursuant to a retail sale made by a retailer not engaged in business in the Commonwealth is a retail sale in the Commonwealth by the person making the delivery. The Commissioner will treat the sale of the property as a taxable Massachusetts sale. However, the Commissioner will treat the cost of transporting the property to a location designated by a retail customer as a nontaxable transportation charge, provided the requirements of Directive 04-5 are otherwise met.

IV. EXAMPLES

The principles of this Directive are illustrated by the following examples:

EXAMPLE 1: A customer enters a Massachusetts retail store, purchases taxable goods with a credit card and directs the vendor to deliver the merchandise to his home in Massachusetts. Regardless of any written agreement or other evidence concerning passage of title, the transportation charges are not subject to tax provided that the requirements of DD 04-5 are otherwise met.

EXAMPLE 2: Same facts as in Example 1, except the customer directs the vendor to deliver the merchandise to a location in New Hampshire. The sale is exempt pursuant to G.L. c. 64H, § 6(b) and 830 CMR 64H.6.7. Neither the sales price of the merchandise nor the transportation charges are taxable.

EXAMPLE 3: A customer enters a Maine retail store with branches in Massachusetts, purchases taxable goods with a credit card, and directs the vendor to deliver the goods to her home in Massachusetts. The Maine retailer must collect Massachusetts sales tax on the goods. See TIR 01-14. The Commissioner will treat the transportation charges as nontaxable, provided that the requirements of DD 04-5 are otherwise met.

EXAMPLE 4: A national discount retail store with locations in 20 states sells a washing machine to a Massachusetts customer from its Massachusetts store. The customer directs the retail store to deliver the washing machine to his home. The retail store has the machine delivered directly to the taxpayer's residence from a warehouse located in New York. The retail store must collect sales tax on the retail price of the washing machine. The transportation charges are not taxable provided the requirements of DD 04-5 are otherwise met.

EXAMPLE 5: A New York furniture dealer not registered as a Massachusetts vendor and without Massachusetts nexus sells a dining room set to a Massachusetts resident. The dealer purchases the furniture from a manufacturer in North Carolina that has nexus with Massachusetts and has it shipped directly to the Massachusetts resident. The North Carolina manufacturer must collect Massachusetts sales tax on its sale to the New York furniture dealer based on the retail sales price of the furniture. The transportation charges are not taxable provided that the requirements of DD 04-5 are otherwise met.

EXAMPLE 6: An auto manufacturer imposes a delivery charge for transporting a new automobile to a Massachusetts auto dealer. The dealer passes this charge on to its customer as a separately stated charge on the invoice. This delivery charge is not excluded from the sales price subject to tax even if separately stated on the dealer's invoice to its customer because it does not reflect the dealer's cost of transporting the automobile to its ultimate customer. Rather, it is considered to be part of the vendor's costs that may not be excluded from the taxable sales price.

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:LEM:wrd

July 7, 2004

DD 04-5



[1] However, a vendor must pay tax on items purchased for use in transporting the property to its customer's location, including packing, crating, etc., unless those items are exempt under another provision of law.