When businesses expand their operations to include shipping products across state lines, the rules for adding sales tax become more complicated. Each state has regulations about when and how to apply sales tax on shipped goods, and the rates can vary depending on the product type, the origin, and the destination. Working through these nuances requires a deep understanding of multistate tax laws to stay in compliance and avoid costly penalties.

Below, we’ll cover how sales tax is added to shipping, how to automate adding sales tax to shipping, and how to handle sales tax when sending goods out of state or internationally.

What’s in this article?

• How is sales tax added to shipping?
  
• How states add sales tax to shipping
  
• How to automatically add sales tax to shipping
  
• Managing sales tax when shipping goods out of state
  
• Managing sales tax when shipping goods internationally
  

How is sales tax added to shipping?

Whether sales tax applies to shipping charges depends on several factors. Here’s a breakdown of how sales tax is added to shipping:

• State laws: First, determine whether the state from which or to which you’re shipping considers shipping charges to be part of the taxable sale. Some states require sales tax on shipping charges if the goods being shipped are taxable, while others don’t tax shipping charges or tax them only under specific circumstances. For example, if shipping and handling are combined as one charge, some states will tax this combined charge if the goods are taxable.

• Product taxability: In states where shipping is taxable, next assess the taxability of the item being shipped. If you are shipping a taxable item, the shipping charge is typically taxable. If the item is not taxable, the shipping charge is also typically not taxable.

• Invoice presentation: Look at how the shipping charges are presented on an invoice. In certain states and jurisdictions, if shipping is listed as a separate line item rather than included in the price of the product or if it’s an optional charge that could be avoided with an alternative such as customer pickup, it’s not taxable.

• Combined with other services: When shipping is bundled with other services such as handling or insurance, the entire charge might become taxable if any part of the bundle is taxable. For example, if a shipping and handling fee is combined into one line item and handling is taxable in the state, the entire charge might be subject to sales tax.

• Exemptions and exceptions: Exemptions and exceptions to these rules are based on the rules of a state or local jurisdiction. For example, some states provide exemptions for shipping charges on items being sent to the government or nonprofits.

How states add sales tax to shipping

The rules for adding sales tax to shipping vary by state. Here’s a breakdown:

States where shipping is usually taxable

In these states, if you charge for shipping as part of an order, it’s taxable if the items being shipped are taxable, regardless of whether the shipping charge is included in the item price or listed separately:

• Arkansas

• Connecticut

• Georgia

• Hawaii

• Indiana

• Kentucky

• Minnesota

• Mississippi

• Nebraska

• New Jersey

• New Mexico

• North Carolina

• North Dakota

• Ohio

• Pennsylvania

• Rhode Island

• South Carolina

• South Dakota

• Tennessee

• Texas

• Vermont

• Washington

• West Virginia

• Wisconsin

States where shipping is taxable if bundled

• California: Shipping charges are typically taxable if they’re part of the purchase price or if the seller is also the shipper.

• New York: Shipping charges are typically taxable if the items being shipped are also taxable, even if they’re listed separately on the invoice. Combined charges for taxable and exempt sales are typically taxable, except if the customer arranges and pays for the shipping directly with a common carrier.

States where shipping is taxable under specific circumstances

• Illinois: Shipping is taxable only if the items being shipped are taxable and the shipping charge is not listed separately on the invoice.

• Florida: Shipping is taxable if it’s part of the purchase price but not if it’s a separate charge and the customer has the option to pick up the item.

States where shipping is usually not taxable

Shipping charges are usually not taxable in the following states, particularly if those charges are stated separately on the invoice (there might be exceptions based on the circumstances or local tax regulations):

• Alabama

• Alaska

• Arizona

• Colorado

• Delaware

• Idaho

• Iowa

• Kansas

• Louisiana

• Maine

• Maryland

• Massachusetts

• Michigan

• Missouri

• Montana

• Nevada

• New Hampshire

• Oklahoma

• Oregon

• Utah

• Virginia

• Wyoming

How to automatically add sales tax to shipping

With Stripe, businesses can automatically add sales tax to shipping charges. Here’s a guide on how to get started:

Set up Stripe Tax

Begin by enabling Stripe Tax in your Stripe Dashboard. Stripe Tax automatically calculates the applicable taxes based on the customer’s location and the nature of the product or service being sold, including shipping.

Configure product and tax categories

Each product and its stock keeping unit (SKU) needs to be formatted under a specific tax category. Stripe uses these categories to determine the taxability of the product and the associated shipping costs. You’ll also need to define the tax category for shipping if it’s considered a separate taxable service. This might be necessary if you operate in states where shipping is taxable only under certain conditions.

Define shipping rates and tax behaviors

Set up your shipping rates in Stripe. You can define different rates based on geographic regions, delivery speeds, or any other relevant criteria. Make sure the shipping rates are marked appropriately so taxes are applied. With Stripe, you can specify whether tax should be calculated on shipping charges based on the destination state’s tax rules.

Automate tax calculation at checkout

When a customer moves to checkout, Stripe Tax automatically calculates taxes based on the customer’s shipping address and the taxability rules of the products and shipping charges. The calculated taxes (including those applicable to shipping) are then added to the order total, and the customer can see the breakdown before finalizing the purchase.

Handle exemptions and special cases

If you work with tax-exempt customers (such as nonprofits), you can manage tax exemptions by configuring customer tax IDs and exemption statuses in the Stripe Dashboard.

For special cases such as mixed shipments (i.e., taxable and nontaxable items together), be sure your Stripe configuration handles allocating shipping taxes based on the proportion of taxable items.

Integrate with ecommerce platforms

If you use an ecommerce platform (e.g., Shopify, WooCommerce), you can integrate Stripe’s payment gateway and tax calculation features into your platform for the simplest customer experience.

Managing sales tax when shipping goods out of state

When shipping goods out of state, how you treat sales tax depends on a few variables: whether you have sales tax nexus established in the destination state, whether the goods are taxable, and the laws of the origin and destination states. Here’s how to handle sales tax for out-of-state sales:

Determine whether you have nexus in the destination state

Nexus is a connection between your business and a state that triggers the obligation to collect and remit sales tax. Nexus can be established through physical presence (e.g., a store or warehouse) or economic activity (e.g., exceeding a certain sales threshold in the state).

Determine the taxability of the goods

Each state has rules on what goods are subject to sales tax. Some common examples of taxable goods include clothing, electronics, and furniture, while groceries and prescription drugs are often exempt. States might also have exemptions for:

• Certain types of goods or purchases

• Drop-shipped goods

• Shipping charges paid directly to common carriers (e.g., USPS, FedEx, UPS) rather than to the seller

Calculate and collect sales tax

If you have nexus in the destination state, you’re typically required to collect sales tax at the rate that applies to the customer’s shipping address. If you don’t have nexus, you’re not obligated to collect sales tax. But the customer might be liable for use tax, which is a tax on the use, consumption, or storage of goods purchased from out-of-state sellers.

Many states have enacted marketplace facilitator laws that shift the responsibility for collecting and remitting sales tax from individual sellers to the marketplace (e.g., Amazon, Etsy) where the sale occurs. If you’re selling through a marketplace, check state laws to determine whether collecting sales tax is your responsibility.

Remit sales tax

Businesses with nexus in a state must file periodic sales tax returns and remit the collected tax to the state’s tax authority. In states where you don’t have nexus, you might be required to provide a notice to customers informing them of their potential use tax liability.

Managing sales tax when shipping goods internationally

When sending goods internationally, sales tax doesn’t typically apply, but other taxes and duties might come into play, depending on the destination country and the type of goods. Before entering into these kinds of operations, thoroughly research the import regulations and tax laws of the destination country and factor in potential import duties and taxes when setting prices.

Who pays shipping taxes and duties?

Incoterms are standardized trade terms set by the International Chamber of Commerce (ICC) that define the responsibilities of customers and sellers in international transactions. These terms specify who is responsible for paying import duties, taxes, and other fees. Make sure you’re clearly communicating with your customers about who is responsible for paying these fees. Common Incoterms include:

• Delivered Duty Paid (DDP): The seller is responsible for all costs, including import duties and taxes, until the goods are delivered to the customer’s specified location.

• Delivered at Place (DAP): The seller is responsible for delivering the goods to the named place in the country of destination, but the customer is responsible for import duties and taxes.

• Ex Works (EXW): The seller makes the goods available at their premises, and the customer is responsible for all transportation and related costs, including import duties and taxes.

International shipping taxes and duties

Harmonized System (HS) codes are standardized codes used to classify goods for customs purposes. Your product’s HS code determines the import duties and taxes that apply. Some countries have de minimis thresholds, which are value limits below which import duties and taxes must not be applied. If there is a trade agreement between the US and the destination country, it can reduce or eliminate import duties on certain goods.

Customs brokers help businesses deal with these aspects of international shipping, including calculating and paying import duties and taxes. Online tools can help you estimate import duties and taxes based on the product, value, and destination country.

Here are some of the fees you can expect to encounter when shipping internationally:

Exporting from the US

You don’t typically need to collect US sales tax when shipping goods to customers outside the US. You might need to comply with US export regulations, depending on the nature of the goods and the destination country.

Importing into the destination country

When importing into another country, you’ll need to pay import duties, which are taxes imposed on goods entering a country. These rates vary depending on the type of goods and the country’s trade agreements. Many countries also have a consumption tax such as value-added tax (VAT) or goods and services tax (GST), which is usually levied on the value of the goods plus any import duties. The rates and application of VAT or GST vary between countries. Some countries might also levy additional taxes or fees such as excise taxes on specific goods (e.g., alcohol, tobacco).