Five Factors of Freight Taxability

Freight taxability: why it's harder than it looks

E-commerce has made shipping a routine part of doing business. But for sellers, freight and shipping charges come with a tangle of sales and use tax rules that change from state to state. Getting them wrong can mean unexpected tax costs or missed exemptions.

This eBook walks you through five questions every seller should ask to determine whether freight charges are taxable on a given transaction.

The five factors every seller needs to know

First, ask whether freight is taxable in the state where the sale originates. Most states treat shipping charges as part of the taxable sales price. Others exempt them entirely. That single variable can change your entire calculation.

Second, consider whether the goods themselves are taxable. Freight taxability often follows the taxability of the product being shipped. If the goods are exempt (like certain food items) delivery charges may be exempt too. But product-level rules vary. In some states, a pumpkin is taxable if used for decoration but exempt if meant for eating.

Third, look at how freight is shown on the invoice. Listing freight as a separate line item can make it exempt in certain states. Bundling it with handling charges as ""S&H"" can make the entire amount taxable, even in states that would otherwise exempt the freight portion.

Fourth, think about who provides the transportation. When a seller uses its own fleet to deliver goods, many states treat shipping as a necessary part of the sale and tax it accordingly. Third-party carriers and postal services may be treated differently.

Fifth, review the shipping terms in the purchase agreement. Free On Board (FOB) origin means the buyer takes title at the point of shipment, and freight is typically exempt in many states under those terms. FOB destination means title transfers on delivery, which usually makes freight taxable.

Why this matters for your business

These five factors interact with each other and with the specific rules of each state. Connecticut, Maryland, and Illinois each handle freight taxability differently, and those are just three examples. Misreading any one factor can lead to over-collecting or under-collecting tax on every shipment.

Understanding the rules is a strong first step. Automating the logic behind them is how growing businesses stay accurate at scale.