Are separately stated transportation/delivery charges subject to Colorado sales tax, including in a drop-shipment where goods ship directly from the manufacturer to the customer?

Plain-English summary

A business-to-business reseller that keeps no inventory in Colorado — most orders are drop-shipped directly from the manufacturer to the customer — lists transportation charges as a separate line item on each invoice and asked whether those charges are subject to sales tax. The Department explained the rule under Special Regulation 18.

Delivery is presumptively a non-taxable service. Transportation of property between a retailer and a buyer is generally a service and is presumptively not taxable (SR 18). But the exemption applies only when the charge is both:
1. Separable from the sale of the taxable property, and
2. Stated separately on a written invoice or contract.

"Separable" is the demanding part. A transportation charge is separable only if the transport service is provided after the property is offered for sale and the seller lets the buyer choose either the seller's transportation or an alternative carrier (SR 18(b)). The company here doesn't offer a choice of carrier, which cuts against separability. Critically, the Department stressed that stating the charge separately does not, by itself, make it separable — the separate line item satisfies requirement (2) but you still need genuine separability under (1).

Drop shipments use the same test. Where the seller has a supplier ship goods directly to the customer, the Department applies the separability test to the supplier's charges that the seller then passes on — treating it no differently than if the seller had charged for delivery from its own location.

Freight-in is taxable. When goods are shipped from the manufacturer to the seller (here, for later hand-delivery), and the seller passes that cost along, those are "freight-in" charges, which are included in the sales tax calculation (SR 18(d)). Freight-in is a cost of bringing goods to market, not a separable delivery to the customer.

What this means for you

Retailers and resellers billing for delivery

To keep delivery charges non-taxable you need both boxes checked: separate line item and true separability — meaning delivery happens after the sale and the customer could have used a different carrier. If you don't offer a carrier choice, or delivery is baked into the deal, the charge can be taxable even though it's itemized. The separate line alone is not a safe harbor.

Drop-ship sellers

The analysis follows the goods, not the paperwork: the Department tests the supplier's transportation charge for separability, exactly as if you'd shipped from your own dock. So a drop-shipped delivery charge can be non-taxable on the same terms — separable and separately stated.

Watch the freight-in trap

The cost to get goods to you before you resell them is freight-in and rides into the taxable price (SR 18(d)) — even if you itemize it. Don't confuse it with a separable outbound delivery to your customer.

Accountants and tax professionals

SR 18 is a two-part test: separable (SR 18(b)) and separately stated (SR 18(c)). Separability requires post-sale transport plus a real alternative-carrier option; separate statement is necessary but not sufficient. Drop shipments push the test onto the supplier's charge. Freight-in (SR 18(d)) is in the base. GIL — no determination on these specific facts.

Common questions

Q: Are delivery charges taxable in Colorado?
A: Not if they're both separable from the sale and separately stated (SR 18). Separable means the transport is provided after the property is offered for sale and the buyer could use the seller's delivery or a different carrier. Listing the charge separately is necessary but not enough on its own.

Q: Does a separate line item on the invoice make delivery non-taxable?
A: No. A separate line satisfies the separate-statement requirement, but the charge must also be genuinely separable from the transaction. Without real separability (including a carrier choice), it can still be taxable.

Q: How does this work for drop shipments?
A: The Department applies the same separability test to the supplier's transportation charge that the seller passes on to the customer — treating it just like delivery from the seller's own location.

Q: What about the cost of shipping goods to me before I resell them?
A: That's "freight-in," and it's included in the taxable sales price (SR 18(d)), even if itemized.

Q: Can I rely on this letter?
A: No. This is a General Information Letter — a general good-faith discussion that makes no specific determination and binds no one. For a binding answer, request a private letter ruling under Reg. 24-35-103.5.

Citations and references

Regulation:
- Special Regulation 18 (SR 18), "Transportation Charges" — SR 18(b) (separability), SR 18(c) (separate statement), SR 18(d) (freight-in included in the sales tax base)

Department procedure:
- Reg. 24-35-103.5 (general information letters vs. private letter rulings)

Related Colorado rulings (delivery / freight-in / drop-ship):
- [[gil-13-006-resale-exemption-certificates]]
- [[gil-13-008-fees-associated-with-company-owned-vending-machines]]
- [[gil-14-016-prepaid-fuel-and-transportation-charges]]
- [[gil-13-002-sales-tax-refunds-when-an-exemption-certificate-is-provided-after-the]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-007.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-12-007
April 4, 2012
XXXXXXXXXXXXXXX
ATTN: XXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Transportation Charges
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXX (“Company”) a request for guidance on the
application of sales tax to transportation charges.
The Department issues general information letters and private letter rulings. A general information
letter provides a general overview of the relevant tax issues and is not binding on the Department.
A private letter ruling provides a specific determination for a specific set of facts, is binding on the
Department but not on the taxpayer, and requires payment of a fee. For more information about
general information letters and private letter rulings, please see Department regulation 24-35-103.5
at www.taxcolorado.org > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Background
Company is a business-to-business reseller and does not manufacture or stock inventory at its
business location in Colorado. It does not have its own transportation services or make arrangements
for transportation services. In most instances, orders made by customers through Company are drop
shipped directly from manufacturer to the customer. In limited instances, products are shipped to
Company for hand-delivery to customers, although Company does not charge a fee for this service.
Company does not offer its customers the option to choose alternative transportation methods.
Company includes transportation charges as a separate line item on each invoice. Company asks
whether these transportation charges are subject to sales tax.
Discussion
Colorado generally does not levy sales tax on the sale of services. Transportation of tangible
personal property between a retailer and a purchaser is generally considered a service and, as such,

is presumptively not subject to sales tax. Special Regulation 18 (SR 18), “Transportation Charges.”1
Transportation charges are not taxable if they are both (1) separable from the sales taxable personal
property and (2) stated separately on a written invoice or contract.
In order for a charge to be “separable” from the sales transaction, the transportation service must be
provided after the taxable property is offered for sale and the seller must allow the purchaser to use
either the seller’s transportation services or an alternative transportation service. See, SR 18(b). In
the case of a “drop shipment,” where the seller contracts with a supplier to ship goods from supplier’s
warehouse directly to customer, the Department applies the “separable” test to the charges of the
supplier, which are then charged by the seller to the customer. In our view, this is no different than
had Company charged for delivery directly from its place of business. Other states follow a similar
approach, where transportation charges incurred in drop-shipment scenarios are not taxable if they
are “separable” from the sales transaction. See, Massachusetts Sates and Use Tax Explanation
21240.
The charges must also be stated separately on a written invoice or contract. SR 18(c). Stating the
charges as a separate line item on an invoice meets this requirement. However, stating the charges
separately does not, by itself, make the transportation charges separable from the sales transaction.
The charges must be actually separable from the transaction, as discussed above, for the sales tax
exemption to apply.
Company states that, in limited instances, orders are shipped from a manufacturer to the Company
for later hand-delivery to the customer. Company does not charge a fee for this service. However,
we assume that Company does pass on to the customer the charges incurred on the initial shipment
from the manufacturer to the Company. These charges are best classified as freight-in charges,
which are included in the sales tax calculation. See, SR 18(d).
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the department does not make a specific determination here on any
of the issues raised and the department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.revenue.state.co.us for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,

1 You can view this Regulation on the Department’s web site at www.colorado.gov/revenue/tax >Tax Library > Rules and
Regulations > Final Tax Regulations > Sales and Use Tax > SR 18.

2

Office of Tax Policy
Colorado Department of Revenue

3