With approximately 19.7 billion tons of freight – worth about $18.8 trillion – transported across the United States in 2022, it’s important for shippers to understand the specific tax obligations tied to freight in each state. If you are a shipper operating within or through North Carolina, navigating these regulations requires a clear understanding of local tax laws to ensure compliance and optimise cost efficiency. Here’s what you need to know about the taxability of freight in North Carolina.

What’s in this article?

• Sales tax on shipping in North Carolina
  
• The fundamentals of US sales tax on shipping
  
• Charging sales tax for out-of-state shipments
  

Sales tax on shipping in North Carolina

In North Carolina, the taxability of shipping charges depends on the taxability of the goods being shipped. If the items are taxable, then the shipping charges are also subject to sales tax. If the items are exempt from sales tax, the shipping charges are also exempt.

This principle applies even if taxable and non-taxable items are shipped together. In such cases, shippers have two options:

• Divide by selling price: Calculate the percentage of the total sale represented by the taxable items, and apply sales tax to that percentage of the shipping charge.

• Divide by weight: Determine the percentage of the total shipment weight represented by the taxable items, and apply sales tax to that percentage of the shipping charge.

The fundamentals of US sales tax on shipping

In the US, each state has its own rules regarding the taxability of shipping and handling charges. Some states always tax shipping if the goods are taxable, while others never do, and some have more nuanced rules. Businesses must adhere to the specific regulations of the states where they have a tax obligation, often determined by the presence of a physical or economic nexus.

When an invoice separates shipping charges from the price of the item, they might be treated differently than when they are combined with the price of the item. Many states allow separately stated shipping charges to be non-taxable if the item being shipped is non-taxable. If shipping is included in the total sales price, it is often subject to the same tax rate as the goods.

There are two different types of shipping terms: free on board (FOB) shipping point and FOB destination. Under FOB shipping point, the buyer takes ownership of goods at the location the goods are shipped from, and some states won’t consider the shipping charges taxable. Under FOB destination, the seller retains ownership until the goods reach the buyer, and shipping charges are usually taxable.

Charging sales tax for out-of-state shipments

North Carolina uses a destination-based sales tax system. This means you charge tax based on where the goods are going, not where they’re coming from.

For shipments heading out of state, you need to know if you have nexus there. This can be due to having a physical presence (e.g. office, store, warehouse) or hitting certain economic thresholds (e.g. $100,000 in sales in-state, 200 separate transactions to state residents). Each state has its own rules on what defines nexus and how businesses with nexus are taxed.

If you do have nexus in the destination state, thoroughly research its sales tax policies to determine whether the goods you’re shipping are taxable or exempt, and whether they apply sales tax to shipping charges.

If you don’t have nexus in the state you’re shipping goods to, you generally don’t need to charge sales tax. Just make sure you document these out-of-state sales properly. Sometimes, customers might have to pay use tax on out-of-state purchases if you didn’t collect sales tax. It’s good practice to inform them of this.