You request a letter ruling on behalf of *************** (the "Taxpayer") that shipping and handling charges collected by the Taxpayer constitute a "transportation charge" which, for Massachusetts sales and use tax purposes, is excluded from the sales price upon which sales and use taxes are based.
The facts as you have represented them in a Summary Statement of Facts are as follows:
The Taxpayer is a direct marketer of general merchandise which constitutes tangible personal property. It solicits orders from retail customers using various media.
Merchandise orders are received by telephone or the Internet. Customers may make payments for merchandise orders by using a credit card or a personal check or money order. Payment is received by the Taxpayer prior to shipment.
The Taxpayer ships merchandise to its customers by U.S. Postal Service or third-party common carriers. While the Taxpayer ordinarily ships goods from its own warehouses, certain items (particularly those that are too large to be efficiently warehoused by the Taxpayer or which, because they are perishable, require special handling) may be 'drop shipped,' that is, shipped directly by the manufacturer or other wholesale vendor to the Taxpayer's retail customers on the Taxpayer's instructions. The Taxpayer does not enter into any written or oral contract or agreement with its customers governing passage of title with respect to any of its sales.
On each order, the Taxpayer imposes a shipping and handling charge. This charge is separately stated from the purchase price of the merchandise in all communications with customers, including the packing slip included with each shipment. For shipments to customers within the continental United States, including Massachusetts, such charge is generally determined as the sum of three components: (i) the common carrier transportation charge, (ii) a handling charge, and (iii) an insurance charge.
The first of these components, the common carrier transportation charge, is based upon contractual common carrier shipping rates, which rates are averaged, without regard to actual destination, according to the weight of the items shipped. The Taxpayer maintains a database of the shipping weights of the items in its inventory and the average third party transportation charge with respect to each such item.
The second component of the shipping and handling charge is a flat charge [of $1.50] per item. The amount of such charge reflects labor and packaging.
The third component of the shipping and handling charge is an insurance charge based upon the self-insurance of all orders. The Taxpayer absorbs the cost of lost, damaged, spoiled, or undeliverable merchandise. The amount of this charge is computed by apportioning the actual or estimated aggregate annual loss on orders among [the Taxpayer's] customers. The amount apportioned to each order is based upon a sliding scale reflecting the price at which merchandise is sold to the [customer]. Thus, the insurance charge is greater with respect to merchandise whose cost, and potential loss, is greater.
The procedure described above is generally used in determining the separately stated combined shipping and handling charge. However, a discount is applied when a customer orders two or more of the same item for shipment to the same address. In addition, the determination of the shipping and handling charge may vary in two other instances. First, in the case of items which are 'drop shipped,' the first and second components of the shipping and handling charge may include larger amounts than described above to the extent the Taxpayer is required to reimburse or pay such amounts to the manufacturer/vendor. Finally, the Taxpayer offers upgraded shipping ( e.g., overnight delivery) at the customer's option. In that circumstance, the first component of the shipping and handling charge ordinarily would be determined by a similar procedure to that described above except that it would average the higher charges applicable to such upgraded delivery. At times, such as on certain holidays, a lower flat rate may be included for upgraded delivery.
In addition, you have submitted three charts to be discussed in part B. of the Discussion below that you state accurately represent the Taxpayer's shipping and handling charges, as well as those of its competitors. From these three charts, we have made two necessary assumptions that form the basis of our ruling. First, we have assumed without independent verification, that the sampling of items which the Taxpayer has provided for our review of its shipping and handling charges are representative of the shipping and handling charges the Taxpayer collects on all items it sells. Second, we have assumed, again without independent verification, that the Taxpayer's competitors' shipping and handling charges, against which as noted in part C. below we have compared the Taxpayer's shipping and handling charges in the aggregate, are themselves reasonable.
A. The General Laws
Under Massachusetts General Laws, a sales tax is imposed on all retail sales in Massachusetts, by any vendor, of tangible personal property at the rate of 5% of the gross receipts of the vendor from all such sales of such property, unless otherwise exempt. G.L. c. 64H, § 2. If no sales tax is paid on the purchase of tangible personal property, a 5% use tax is imposed on the storage, use, or other consumption of the property in Massachusetts. G.L. c. 64I, § 2. Otherwise, purchases upon which sales tax has been collected are exempt from use tax by G.L. c. 64I, § 7(a).
"Gross receipts," as those words are used in § 2, are defined as being the equivalent of "sales price" which is defined as "the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise." G.L. c. 64H, § 1. In determining the "sales price," § 1 expressly states, in pertinent part, that no deduction shall be taken on account of the cost of transportation of property prior to its sale at retail, and that separately stated transportation charges shall be excluded from the sales price, if the transportation occurs after the sale of the property is made. G.L. c. 64H, § 1 ("sales price" (a)(iii) and (c)(v)).
Under Directive 98-5, separately stated combined shipping and handling charges,  such as those at issue, are transportation charges excluded from the taxable sales price provided that (1) the transportation occurs after a customer pays for or incurs an obligation to pay for the tangible personal property to be transported; (2) the charges reasonably reflect the costs of transportation of the tangible personal property sold; and (3) there is a written contract or agreement of sale respecting the property, where either: (a) the contract of sale is silent on the transfer of title, and delivery will be made by a third party carrier, or (b) the contract specifies that title passes to the customer before transportation or delivery of the property purchased.
Based on your representation of the facts, requirements (1) and (3) are met. Merchandise is always paid for prior to shipment, and although every contract of sale is silent with respect to title transfer, third party carriers are always used in making deliveries. Thus, the only issue to be resolved is whether the charges at issue "reasonably reflect the costs of transportation of the tangible personal property sold."
B. The Reasonableness Requirement
In DD 98-5, whether a lump sum shipping and handling charge is reasonable is a question of fact, but charges must generally lie within a range of prevailing charges for similar delivery services. Additionally, the directive implies that 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 DD 98-5, examples 3 and 4. In other words, a lump sum shipping and handling charge which contains a substantial profit component is not reasonable. The burden of proof with respect to the validity of any transportation charge excluded from the sales price is upon the vendor, who (or which) must keep appropriate records of every sale. Id.
As proof that the charges at issue are "reasonable" within the meaning of DD 98-5, the Taxpayer has provided the three charts noted in the Facts above for our review. The first chart contains a sampling of the merchandise recently sold and delivery charges recently collected by the Taxpayer in delivering such merchandise. The Taxpayer asserts that the merchandise and charges listed are representative of the merchandise it sells and charges it collects. Twenty-eight items are listed. For each item listed, there is included: (1) the selling price and weight of the item; (2) the amount paid by the customer for shipping, handling, and insuring the item; and (3) the Taxpayer's actual cost to ship the item.
The method the Taxpayer uses to calculate the common carrier transportation portion of the shipping and handling charge included in chart one is, as described in the Facts above, based upon the weight of the merchandise shipped. The Taxpayer maintains a database of what it pays a third party transportation carrier to ship an item of that weight. When a customer purchases an item, the amount charged to the customer for shipping is the average cost (based upon the Taxpayer's database) that the Taxpayer pays to third party transportation carriers for shipping an item of similar weight. Although the actual distance that an item is shipped is not directly reflected in the customer's shipping charge, distance is factored into the customer's shipping cost indirectly through an averaging of the total shipping costs that the Taxpayer pays to third party transportation carriers to ship items of similar weight to locations across the country. 
The second chart contains a summary of the shipping and handling procedures and rates, both general and upgraded, of fifty direct marketers that the Taxpayer asserts are its competitors, as published in the competitors' catalogs. Unlike the method the Taxpayer uses to calculate shipping and handling charges, the majority of the marketers listed calculate shipping and handling charges based upon a percentage of the sales price.  Like the Taxpayer, however, such marketers generally ship merchandise to customers by U.S. Postal Service or third party common carriers.
As reflected in the second chart, each of the Taxpayer's competitors charges a minimum rate for shipping and handling, ranging from a low of $2.95 to a high of $8.50. Additionally, the majority of the Taxpayer's competitors apply a cap on the shipping and handling rates they charge, ranging from a low of $10.00 to a high of $30.00. Those of the Taxpayer's competitors that do not impose a rate cap however, base their rates over and above a certain price on a percentage (5% to 15%) of the order value.
The third chart ties the first two charts together. It contains the same list of merchandise as in the first chart, as well as the selling price of and amount paid by the customer for shipping, handling, and insuring the item. Additionally, it includes, for every item listed, a high and low range of prevailing charges for similar delivery services, compiled from the data in the second chart relating to the fifty direct marketing competitors of the Taxpayer. The third chart allows a comparison of the charges at issue to the range of prevailing charges included in chart two.
C. Charges at Issue Reasonably Reflect Costs of Transportation
Based upon a review of chart one, we conclude that the lump sum shipping and handling charges paid by the Taxpayer's customers, in the aggregate, do not contain a substantial profit component. Additionally, in comparing charts one and two, it is not relevant that the Taxpayer's rates are averaged, without regard to actual destination, according to the weight of the item shipped; whereas, the majority of the other marketers calculate shipping and handling charges based upon a percentage of an item's sales price. Under DD 98-5, what one marketer charges for shipping and handling a particular item compared to what the industry as a whole charges to deliver a comparable item is the test of whether a lump sum shipping and handling charge is reasonable. Under DD 98-5, whether a charge is "reasonable" depends upon whether the charge lies within a range of prevailing charges for similar delivery services, not upon how the charge is derived vis-a-vis how others in the industry would have derived it. Moreover, as implied by examples 3 and 4 in DD 98-5, whether a charge is reasonable also depends upon whether or not the charge contains an excessive profit component.
Finally, an analysis of the third chart reveals that each combined shipping and handling charge, general or upgraded, charged by the Taxpayer lies within the range of prevailing rates charged by the other marketers for similar delivery services. In fact, the Taxpayer's shipping and handling charges generally appear to fall below the median rates charged by the other marketers for similar items of merchandise. Accordingly, we conclude that the charges at issue reasonably reflect the costs of transportation of the tangible personal property sold.
Based on the facts as you state them, we rule that the Taxpayer's combined shipping and handling charges constitute a "transportation charge" which, for Massachusetts sales and use tax purposes, is excluded from the sales price upon which sales and use taxes are based.
Very truly yours,
/s/Frederick A. Laskey
Frederick A. Laskey
Commissioner of Revenue
 Pursuant to DD 98-5, "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." DD 98-5, footnote 1. "Separately stated charges for 'handling' alone, as opposed to charges for both 'handling and shipping,' are generally not treated as transportation charges [however]." Id., footnote 2.
 According to several third party transportation carriers we contacted, their shipping charges are generally calculated based on distance and weight; less often, they are based on size as well.
 Under DD 98-5, it is expressly stated that shipping and handling charges based upon a percentage of the sales price will be considered reasonable provided they lie within the range of prevailing charges for similar delivery services.
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