|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Sales and Use Tax
March 27, 2013
On behalf of your client, ******************************** (the “Supplier”), you have requested a letter ruling with respect to the Massachusetts sales tax as it applies to the Supplier’s freight insurance charges which are billed to and paid by the Supplier’s customers. Supplier charges Massachusetts sales tax on the freight insurance charges. The freight insurance charges and the total amount of the sales tax on each order are separately stated on all communications with the Supplier’s customers. The following is your representation of the facts upon which this ruling is based.
Supplier is a multi-national reseller of test equipment and information technology solutions headquartered in Massachusetts with locations in other states. Supplier also rents merchandise to customers. Supplier receives orders from its customers by telephone or the Internet. Some of the Supplier’s merchandise is shipped directly by the manufacturer or wholesale vendor to the Supplier’s customers (“drop shipped”) pursuant to the Supplier’s instructions. Some of the Supplier’s merchandise is shipped directly by the Supplier from one of its warehouses to the customer. Supplier uses third-party common carriers of its choice to transport virtually all of its merchandise to its customers. A customer can use a common carrier of its choice provided the customer informs the Supplier’s order entry employee at the time the customer places the order. Most customers do not select their own common carrier and use the common carrier selected by the Supplier.
Supplier automatically adds freight insurance to all sales or rentals and the freight insurance charge is separately stated on all communications with customers. For shipments made on or before July 31, 2012, Supplier added freight insurance at the rate of three-quarters of one percent (0.75%) to the price of all products unless the customer used its own common carrier. For shipments after July 31, 2012, the freight insurance rate is one percent (1.00%).
The Supplier bases the charge for freight insurance on the prevailing rates charged by insurance companies and not on actual losses incurred by the Supplier. The Supplier charges Massachusetts sales tax at the current rate of 6.25% on the freight insurance charge. The freight insurance charge and the total sales tax applicable to a transaction are separately stated on all communications with customers. A customer can make payments by a using a credit card, check or money order. The Supplier receives payment after the customer receives the merchandise.
Supplier is a party to a multi-year contract with **************************************************************** a Massachusetts company (“Massachusetts Customer”). Supplier provides equipment, either through sale or rental, and performs services in support of the information technology business operations of the Massachusetts Customer.
The contract with the Massachusetts Customer provides the shipment of both purchased products and rented products shall be made FOB origin. The risk of loss for both purchased products and rented products passes to the Massachusetts Customer upon receipt of the products by a common carrier. All products furnished by Supplier are subject to an acceptance period. This acceptance period includes the time necessary for the product installation and the subsequent time during which the Massachusetts Customer verifies the product functions in accordance with the manufacturer’s specifications. The Massachusetts Customer may either accept the product in writing or not accept the product. If the product is not accepted, the manufacturer, not the Supplier, will repair or replace the product in accordance with the manufacturer’s agreement with the Massachusetts Customer. The Supplier agrees to use its best efforts to negotiate and to return non-acceptable products to the manufacturer. Title to purchased products passes to the Massachusetts Customer on the date of complete payment for the product which occurs after the expiration of the acceptance period. Title to rented products remains with the Supplier.
The Massachusetts Customer paid freight charges and insurance charges from the Supplier’s shipping location to the Massachusetts Customer’s specified location. The freight charges and the insurance charges are listed as separate line items on the Supplier’s invoice. The Supplier separately states the actual freight charges and the freight insurance charges and charges Massachusetts sales tax at the rate of 6.25% on the freight insurance charges. Charging Massachusetts sales tax on the freight insurance charges and separately stating the freight charges, freight insurance charges and the total amount of the sales tax on the invoices of the Massachusetts Customer is consistent with the Supplier’s billing practices for other customers.
II. RULING REQUESTED
Are Supplier’s separately stated freight insurance charges to Massachusetts Customer subject to Massachusetts sales tax?
A separately stated freight insurance charge is not a transportation charge and is subject to Massachusetts sales tax under the particular facts presented here.
IV. LAW AND ANALYSIS
Under Massachusetts General Laws, a sales tax is imposed on all retail sales in Massachusetts, by any vendor, of tangible personal property or of services performed in the Commonwealth, at the rate of 6.25% of the gross receipts of the vendor from all such sales of tangible personal property or services, unless otherwise exempt. G.L. c. 64H, § 2. If no sales tax is paid on the purchase of tangible personal property, a 6.25% 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 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 states, in pertinent part, that “(a) no deduction shall be taken on account of (i) the cost of property sold; (ii) the cost of materials used, labor or service cost, interest charges, losses or other expenses; (iii) the cost of transportation of the property prior to its sale at retail; (b) there shall be included (i) any amount paid for any services that are a part of the sale; … and (c) there shall be excluded … (v) transportation charges separately stated, if the transportation occurs after the sale of the property is made.”
The Department’s current policy regarding the application of Massachusetts sales tax to transportation charges associated with the sale of tangible person property is discussed in DD 04-5. A transportation charge is a charge by the seller of tangible personal property for the preparation of and the delivery of goods to a location designated by the purchaser. A transportation charge is excluded from the sales price subject to tax provided 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.
The freight insurance charge is not a component of preparing and moving the goods from the vendor to the customer. DD 04-5 contains a list of types of transportation charges. These transportation charges include “postage,” “freight,” “shipping,” “handling,” “transportation,” “shipping and handling,” crating, packing or the like. All of these examples reflect activities that are necessary to prepare goods for safe shipment and to move the goods to the location selected by a buyer. The freight insurance is not listed as a transportation charge. Insurance protects against the economic loss resulting from the damage to or the loss of goods. Freight insurance is therefore included in the sales price subject to Massachusetts sales tax. G.L. c. 64(H), § 1 (“sales price”). The Supplier uses the proceeds of the freight insurance charge to pay for damages to and the loss of goods sent to buyers.
The Supplier’s freight insurance does not prepare goods for shipment and does not move goods from the Supplier to the Massachusetts Customer. The freight insurance is not a transportation charge, within the meaning of Directive 04-5, and is therefore not excluded from the sales price subject to tax under the facts described in this ruling.
Very truly yours,
Commissioner of Revenue
 If a customer informs the Supplier’s order entry employee at the time the customer places the order that the customer will use a common carrier of its choice, freight insurance is not added to the order. The Supplier’s order entry employee requires a customer sign a Freight Insurance Waiver form indicating the customer is declining insurance. The Massachusetts Customer that raises the issue at hand never selected a common carrier of its own choice and did not execute any Freight Insurance Waivers.