Sales Tax Slice: The Tax Base—a Perennial Challenge for Sales Tax Professionals

If you hang around state tax professionals long enough, you are bound to hear a discussion about the “tax base,” or the measure on which a state assesses or determines tax liabilities. Sales and use tax presents tax base questions fairly routinely. The issue: for any given transaction, what (if any) components should we remove before calculating how much tax the retailer should collect? That is to say, what should we remove before we multiply the tax base by the tax rate? As is typical in state tax—and indeed in most legal analysis—the answer is that “it depends.”

Shipping and handling costs pose a common example of states’ varying approaches to tax base questions. A state might mandate that retailers collect sales tax on, say, the “gross proceeds” of a “retail sale.” Must the retailer include shipping and handling costs in that amount (i.e., in the tax base)? In many states, no; if the retailer separately states shipping and handling charges on the receipt or invoice, then the retailer need not collect sales tax on those charges. But that approach is not universal. In some states, the retailer must collect sales tax on shipping and handling charges even if it separately states those charges.

Keeping other factors equal, retailers typically would prefer operating in states where shipping and handling costs are excluded from the tax base. A smaller tax base means that the retailer collects less tax on the transaction; less tax collected means that the consumer can shell out fewer dollars on the purchase; and a decreased purchase price makes purchasing the retailer’s products a more attractive choice to a consumer than the consumer’s other economic options. 

I came across an interesting tax base question in my personal life recently. After visiting a local burger joint with some friends, I noticed that our receipt included not only a line item for sales tax (which I expected), but also a line item for a curiously named “envirocharge” (surprise!). After doing some digging, I learned that the restaurant adds a one-percent “environmental administration charge” on all of its sales. It donates the collected funds to charity.

Between bites of my delectable, hamburger-y goodness, I wondered whether itemizing the surcharge is a noble business practice, a savvy play to win over environmentally conscious consumers, or both. (Apparently, I was not alone.) Further, I was curious whether the company can collect and remit tax on just the food portion of the sale, or whether it must collect and remit tax on both the food and the surcharge. The tax difference between a party’s $36.00 bill and a $36.36 bill might seem like chump change, but it is nonetheless important to calculate it correctly, and the difference adds up quickly when you consider how many people like to eat hamburgers around here.

Shipping and handling charges and discreet environmental surcharges are but two examples of tax base matters that sales tax professionals must consider, and other examples are plentiful. We routinely wade deep into discussions of discounts, rebates, coupons, trade-ins, tips, gratuities, and exchanged and returned merchandise. In each case, we ask ourselves, “should the retailer collect sales tax on that part?”

Continue the discussion on LinkedIn: Should states impose sales tax on shipping and handling charges?

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