US Sales Tax & Retail Delivery Fee Implications for E-Commerce Businesses

The rise and expansion of e-commerce brought many positive changes for consumers and businesses operating in the industry. However, e-commerce businesses must understand different sales tax rules and regulations, including those applicable to shipping and delivery.

As online shopping continues to grow, so does the complexity of sales and use tax associated with these fees, particularly in light of the introduction of economic nexus. This article clarifies general and specific state-specific taxability rules and examines potential shifts in managing retail delivery fees, primarily focusing on the models implemented in Colorado and Minnesota.

Taxability of Shipping and Delivery Fees in E-commerce

Although there are many state-by-state rules regarding the taxation of delivery fees, some general rules apply. But before moving on to the general rules, it is necessary to underline that while terms delivery and shipping may have different meanings in specific contexts, governing tax bodies, such as the Michigan Department of Treasury or the New York Department of Taxation and Finance, use these terms interchangeably. 

The delivery fees also typically include any charges for handling, postage, freight, transportation, drayage, transfer, crating, packing, wrapping, parcel post, portage, loading, rigging, tonnage, weight, burden, and documentation.

In most US states, delivery fees on invoices for taxable goods or services are subject to sales tax. Conversely, if the sales are non-taxable or exempt, the delivery charges or fees are also exempt. However, the issues may arise when transactions include taxable and non-taxable goods and services. These transactions are known as bundled transactions, and taxability rules depend on whether they are charged as a single price or listed separately.

Generally, if taxable and non-taxable goods and services are sold for a single price, the whole transaction, including any delivery charges, is taxable. Consequently, if goods and services are listed separately on the invoice, sales tax is typically not collected on non-taxable charges.

However, there are exceptions to these general rules. For example, in Washington, when a single delivery charge applies to a sale that includes taxable and non-taxable goods, sales tax does not apply to the entire delivery fee. Instead, a percentage model determines the portion of the delivery charge relating to the taxable goods in the order.

Sellers can use one of the two calculations to determine the taxable percentage of the delivery charge. The seller must allocate the delivery cost proportionately, by comparing the total sales price or the total weight of the taxable goods to the overall shipment. For example, if 65% of the order’s value or weight is tied to taxable goods, 65% of the delivery charge would be subject to sales tax.

An additional example of a different rule application can be found in Virginia, where handling charges are taxable, but shipping charges are not. If shipping charges are listed separately, they are not subject to sales tax, but if combined with handling charges, both are subject to sales tax.

Recent Changes and Trends in Retail Delivery Fees

Even though sales and use tax rules for delivery and shipping fees are well established among US states, legislators are supporting the introduction of retail delivery fees due to a decline in fuel tax revenues, caused by the increase in fuel-efficient and electric vehicles used for deliveries.

Colorado - The Pioneer of Retail Delivery Fees

Colorado was the first US state to impose a retail delivery fee as part of a broader transportation funding initiative. In 2022, Colorado imposed a fee on motor vehicle deliveries to a location in Colorado with at least one item of tangible goods subject to state sales or use tax. The delivery fee consists of six different fees, totaling USD 0.29. 

Under the introduced rules, retail sellers, such as e-commerce or marketplace facilitators, that collect sales and use tax on tangible goods sold and mailed, shipped, or otherwise delivered by motor vehicle to a consumer in Colorado are liable to remit the retail delivery fee. Notably, the fee applies regardless of whether the motor vehicle is owned or operated by the retailer or a third party, such as a shipping company or the United States Postal Service.

However, if all the items in a retail sale are exempt from sales tax, the delivery is also exempt from retail delivery tax. Additionally, Colorado legislation provides an exemption for businesses whose retail sales of tangible goods or services in Colorado in the previous year were USD 500,000 or less. Exemption is allowed for e-commerce sellers that do not have physical presence and did not establish an economic nexus, meaning their total annual retail sales in Colorado are USD 100,000 or less.

Minnesota 2024 Retail Delivery Fee

Following Colorado's example, Minnesota introduced a USD 0.50 retail delivery fee on July 1, 2024, applicable to each transaction involving tangible goods subject to sales tax and clothing valued at USD 100 or more. In-scope taxable persons may collect and remit the retail delivery fee from the consumer or track and pay it themselves.

Similarly to Colorado, Minnesota also defined exemption rules for retail sellers, whose total retail sales in the previous year were less than USD 1 million. Furthermore, marketplace facilitators and remote sellers, such as e-commerce businesses, whose total facilitated or made sales in the previous year were below USD 100,000, are not liable for the retail delivery fee.

Introduction of Retail Delivery Fee in Other US States

Currently, only Colorado and Minnesota have retail delivery fee rules in place. However, other US states, such as Nevada, Indiana, Maryland, Mississippi, Nebraska, New York, and Washington, are assessing or proposing a retail delivery fee.

In the City of New York, a USD 3 delivery fee is proposed for online delivery transactions ending within the city. The fee will fund the city's operating costs of buses and subways. Additionally, the New York Assembly proposed a retail delivery fee of USD 0.25 on each delivery transaction made within the state.

In 2024, the Washington State Transportation Committee released an elaborate study regarding introducing the statewide USD 0.30 retail delivery fee, proposing July 1, 2026, as the effective date.

Impact on E-Commerce Businesses

While the positive effects of introducing retail delivery fees for state governments are apparent, it should be noted that it poses significant challenges for e-commerce businesses, notably increasing administrative burdens and operational costs. Monitoring and fulfilling retail delivery fee requirements may be especially challenging for e-commerce businesses operating in multiple states.

The largest US e-commerce and delivery companies, such as Amazon, DoorDash, and Uber, have already expressed concerns about this measure's negative impact on profit margins and contribution to diminishing competitiveness.

Additionally, should companies decide to transfer these fees to consumers, it could lead to reduced demand for delivery services as consumers would seek to avoid additional costs relating to their orders and purchases. Consequently, this could negatively impact overall sales volumes.

Conclusion

Introducing the retail delivery fee for transactions relating to tangible goods subject to sales and use tax, shipped or delivered to consumers directly, could become the new norm in the US regulatory framework. Since these fees are closely related to goods and services subject to sales tax, remote or out-of-state sellers, such as e-commerce businesses, must monitor these changes closely.

As seen in the examples of Colorado and Minnesota, out-of-state businesses that do not exceed the economic nexus threshold are not subject to the retail delivery fee. This further confirms the close tie between sales and use tax, on one side, and retail delivery fee on the other. Thus, the retail delivery fee is on its way to becoming an additional compliance requirement and challenge for retailers subject to sales, including e-commerce.

Source: New York Department of Taxation and Finance, Washington State Department of Revenue, Massachusetts Department of Revenue, Michigan Department of Treasury, Indiana Department of Revenue, Virginia Department of Taxation, VATabout, Colorado Department of Revenue, Washington State Transportation Committee