30 Aug How Will Sales Tax Obligations on Delivery Fees Affect Your Business?
By: Kristi Wilkins, CPA
Additional clarification from the Missouri Department of Revenue regarding sales tax obligations on delivery fees could affect your business if delivery services are offered. While the Missouri sales tax rules and regulations have not changed, the following court case presents an opportunity for you to review how these laws are applied to delivery fees.
Recently, the Missouri Department of Revenue notified Missouri businesses about the taxability of shipping and delivery charges. This notification was the result of a new Missouri Supreme Court ruling. In the case of Alberici Constructors, Inc. v. Director of Revenue, 452 S.W.3rd 632 (Mo. banc 2015), the Supreme Court based the taxability of delivery fees on the following factors:
- Whether delivery charges are separately stated on the invoice
- When title passes from the seller to the buyer
- Who controls the cost and means of delivery
- Who assumes the risk of loss during delivery
- Whether the seller derives financial benefit from the delivery
Many businesses assume they are not subject to sales tax due to their separately stated delivery fees; however, that is not the only factor to consider. In the Alberici Constructors case, the Missouri Supreme Court took a closer look at the intent of the parties at the time of the contract by stating, “In determining whether a delivery charge is a part of the sale transaction, the intention of the parties is the guiding factor.”
What does this mean for your Missouri-based business? It appears, the Missouri Department of Revenue has taken the stance that if the tangible personal property being delivered is subject to sales tax, the delivery fees associated with that property also are subject to sales tax. Therefore, it is best to start with this assumption as you walk through the possible exemptions that might exclude delivery fees from sales tax. If delivery or shipping fees are not charged on the tangible personal property sold by your business, or those fees are included in the price of the item sold, this ruling does not affect your business activity. If delivery fees are charged and do not fall under the resale, not-for-profit, or out-of-state exemption, the first thing to consider is if the separately stated delivery charges are intended to be part of the sale. The five factors above are a good place to start, but this list is not comprehensive. It also is important to note that the significance of each factor may change based on the facts and circumstances of each case.
Separately stated delivery charges – The Missouri Supreme Court specifically stated, “taxability does not depend on whether the parties intended the charges for the delivery service to be part of the sales price,” but “whether the parties intended the provision of the service to be part of the sales transaction.” Therefore, separately stating the delivery charges does not automatically make them exempt from sales tax; this is especially true if the charges are a required part of the sale. Delivery charges that are not separately stated are considered part of the sales transaction and subject to sales tax.
Title passing from seller to buyer – In Title 12 of the Code of State Regulations 10-113.200(3)(A), the Missouri Department of Revenue defines it as such: “Title transfers when the seller completes its obligations regarding physical delivery of the property, unless the seller and buyer expressly agree that title transfers at a different time. A recital by the seller and buyer regarding transfer of title is not the only evidence of when title passes. The key is the intent of the parties, as evidenced by all relevant facts, including custom or usage of trade.” To determine if tangible personal property is subject to sales tax, one must assess if title passes within the state of Missouri or outside of state lines. If title passes outside of Missouri, the item is not subject to Missouri sales tax and neither are the delivery fees associated with that item. When title passes inside Missouri on a tangible item, delivery fees are subject to sales tax if the seller has title during the delivery.
Cost and means of delivery – The Alberici Constructors case also referenced Brinson Appliance, Inc. v. Director of Revenue, 843 S.W.2d 350, (Mo. banc 1992). In the Brinson Appliance case, delivery charges were not taxable because the cost and means of delivery were entirely up to the customer. The customers could take the items from the store, hire a common carrier, or use a carrier selected by Brinson Appliance. If Brinson Appliance selected the carrier, they would arrange for delivery from a third-party carrier (upon request of the customer), collect payment from the customer, and use this sum to pay the third-party carrier. In this situation, the delivery method was the customer’s decision, not the seller’s. If a shipping or delivery charge was mandated as a part of the sale, all delivery fees would be subject to sales tax. However, simply giving the buyer an option for the method of delivery does not automatically negate sales tax on the delivery fees. You also should consider who assumes risk of loss and whether the seller derives financial benefit when title passes.
Assuming risk of loss during delivery – This factor looks at who has financial responsibility for damage or destruction of the property during delivery, which is governed by the Missouri Revised Statutes 400.2-509. All other factors aside, if the seller assumes the loss of the item, the delivery charges should be subject to sales tax.
Seller derives financial benefit – If the customer is able to arrange the delivery method, in most cases, the seller would not receive any financial gain. In the Brinson Appliance case, the seller was an intermediary between the buyer and delivery service and received no financial gain. This could change if the seller charged delivery fees for using their own vehicle or added a surcharge to arrange the delivery, as financial gain for the seller would lead to the taxability of the delivery fees.
Many circumstances could affect one or all of these five factors. Every business and transaction could have a different outcome based upon underlying issues. The key is the intention of the parties involved and the actions that support those intentions. The Alberici Constructors case has put an emphasis on the taxability of shipping and delivery fees; therefore, taking the time to review all business delivery transactions is highly recommended.
For additional questions, please contact your KPM advisor.