Sandra McClarty, CPA, Kirk Low, CPA. Tennessee CPA Journal. December 2007.
Effective Jan. 1, 2008, all delivery charges invoiced on taxable sales delivered in Tennessee are subject to Tennessee sales tax. This change was enacted by the Tennessee legislature in June 2007 when legislation was adopted to accelerate the implementation of all Streamline Sales Tax Project (SSTP) definitions . These definitions are part of the SSTP statutes originally passed in 2003 with a delayed effective date. Other SSTP statutes such as: 1) the requirement that sales delivered or shipped to the customer be sourced to the delivery or shipping destination; 2) modifications to the single article on local option sales taxes; and 3) implementation of certain privilege taxes in lieu of sales tax have a delayed effective date of July 1, 2009.
As many of you may recall, the SSTP statutes require Tennessee to change from origin sourcing to destination sourcing when determining the applicable sales tax rate to be charged on sales delivered to a Tennessee address. Concerns from the local governments regarding local tax revenue shifts as well as businesses and taxpayers regarding the administrative difficulty and cost of such a change resulted in the legislature postponing STTP statutes twice.
Tennessee Code Annotated §67-6-102 adopted effective Jan. 1, 2008, changes the definition of “sales price” to include delivery charges. Thus, if the sale is taxable, the freight is taxable. This statute reads, in pertinent part, as follows:
(A) “Sales price” applies to the measure subject to sales tax and means the total amount of consideration, including cash, credit, property and services, for which persona l property or services are sold, leased or rented, valued in money, whether received in money or otherwise, without any deduction for the following:
- The seller ‘s cost of the property sold;
- The cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller and any other expense to the seller;
- Charges by the seller for any services necessary to complete the sale, other than delivery and installation charges;
- Delivery charges;
- Installation charges; and
- The value of exempt personal property given to the purchaser where taxable and exempt personal property have been bundled together and sold by the seller as a single product or piece of merchandise.
The Tennessee Department of Revenue has indicated that delivery charges will include charges for transportation, delivery, shipping, shipping and handling, incoming freight, outgoing freight, packing, crating and postage. This change replaces the current Tennessee Rule 1320-5-1-.71 which specifies that certain freight charges are exempt if the title or risk passed at the origin shipping point.
To avoid tax on freight, the taxable item must be delivered by a dependent third-party hired by the buyer and the delivery charges must be billed to and paid by the buyer direct to the third-party.
If a sale includes both taxable and non-taxable personal property or services, a single delivery charge must be allocated between these two types of items. The Department of Revenue has indicated that it will accept an allocation based upon sales prices or the weights of the respective items. An Important Notice is expected to be issued shortly to clarify this issue.
In addition, please watch for that notice to clarify the following:
- Stand-alone transportation charges – Transportation services provided by passenger or cargo transportation companies or messenger services remain nontaxable services.
- Direct mailing of printed materials – The postage and mailing services provided by businesses such as printers will not be taxable if the materials are mailed to a mass audience and recipients are not billed for the price of the printed materials. The invoices must itemize the postage and the services charges for preparing the materials for mailing.
Relief related to the taxation of delivery charges has been provided to certain taxpayers such as contractors, subcontractors and material vendors of tangible personal property. In order to treat the delivery charges as provided for in Tennessee Rule 1320-5-1-.71, a lump sum or unit price construction contract must have been entered prior to Jan. 1 2008 or awarded by the state and other political subdivisions of the state where the bird was opened prior to Jan. 1 2008.
These taxpayers will need to file a claim for refund if they meet the criteria above and their vendor charges them the sales tax in excess of that which would otherwise be due under Rule 1320-5-1-.71. Note that this relief does not apply to other types of buyers. It specifically refers only to contractor, subcontractors and material vendors who meet the criteria discussed previously. See Tennessee Code Annotated §67-6-541(b), (l), (2) and (3) for further information.