Is a 'consolidated freight charge' for moving goods between a seller's own facilities subject to Colorado sales tax, even if separately stated?

Plain-English summary

A company that designs, makes, and distributes retail store fixtures, point-of-sale displays, workstations, and cable trays is rolling out a new "consolidated freight charge" — a fee for moving a product from one of its own facilities to another so a customer's order can be combined and shipped from a single point. The charge is calculated as a flat percentage of the invoice price of the product being transferred. The company asked whether the charge, if separately stated, is taxable.

Colorado computes sales tax on the purchase price, which includes all costs the retailer incurs in making a sale. Charges for services separable from the sale of the goods aren't included, and services performed after the product is brought to market generally aren't included either. The Department applied two tests:

Test 1 — Is the move before or after the sale?

• After the sale = "drop shipment," not taxable. Transportation of property between a retailer and a purchaser happens after the goods are brought to market, so it's generally not part of the taxable price.
• Before the sale = "freight-in," taxable. Freight-in charges are for transporting property from the place of production or manufacture to the seller (or its agents, through any chain of middlemen) — i.e., pre-sale transportation to bring goods to market — and they are included in the tax.
• Applied: if the consolidated freight charge genuinely occurs after the product is purchased, it looks like a non-taxable drop shipment. But if it's assessed regardless of whether a sale happens, or before the purchase is complete, it looks like taxable freight-in.

Test 2 — and "more importantly" — does the charge fairly reflect the actual cost of transportation? A transportation charge must fairly reflect the cost of transportation; this rule exists to stop sellers from shifting part of the taxable purchase price into a "non-taxable" transportation line. If the stated charge doesn't reflect real transport cost, the Department presumes it belongs in the taxable price. Transportation costs normally vary with weight, distance, size, volume, and delivery time — and the Department said it's unclear how a flat percentage of the invoice price could properly reflect the cost of moving and consolidating goods. So if the flat-percentage charge doesn't fairly reflect actual transport cost, it's taxable.

What this means for you

Manufacturers and distributors

A freight line between your own plants to consolidate an order is vulnerable. To keep it out of the taxable price you generally need both: the move to follow the customer's purchase (post-sale shipping, not pre-sale freight-in), and a charge that tracks the real cost of transportation. A flat percentage of invoice value is a red flag — it looks like a markup, not a transport cost, and the Department will presume it's taxable.

Retailers structuring delivery charges

Separately stating a freight charge is not enough. The charge has to be a genuine, cost-reflective transportation charge for post-sale delivery. Base it on weight/distance/size, not on a percentage of the sale price, or expect it to be folded back into the taxable base.

Accountants and tax professionals

Two overlapping screens: the timing test (pre-sale freight-in taxable vs. post-sale drop-shipment exempt under SR 18) and the cost-reflectiveness test (a charge that doesn't fairly reflect transport cost is presumed part of the purchase price — the anti-shifting rule). A percentage-of-invoice freight charge fails the second test almost by definition. Watch the home-rule-city caveat below.

Common questions

Q: Is a consolidated freight charge taxable in Colorado?
A: Usually yes, unless it both occurs after the customer's purchase (a non-taxable post-sale drop shipment) and fairly reflects the actual cost of transportation. A pre-sale move or a charge that doesn't reflect real transport cost is taxable.

Q: We separately state the charge — isn't it automatically non-taxable?
A: No. Separate statement isn't enough. The charge must be for post-sale transportation and must fairly reflect actual transportation cost.

Q: Why is a flat percentage of the invoice a problem?
A: Because real transportation cost varies by weight, distance, size, and volume — not by the price of the goods. A flat percentage looks like a way to shift taxable sale price into a "freight" line, so the Department presumes it's taxable.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes and rules:
- §§ 39-26-104(1), 102(7)(a), C.R.S. (purchase price includes all costs of making the sale)
- 1 CCR 201-5, SR 18 (transportation, freight-in, and drop-shipment charges)

Related rulings: [[gil-14-016-prepaid-fuel-and-transportation-charges]] (freight-in vs. post-sale shipping), [[gil-15-012-delivery-charge]], [[plr-23-007-taxability-of-delivery-fee]], [[plr-24-008-sourcing-sales-when-customer-arranges-for-third-party-shipping]].

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-14-022.pdf

Original ruling text

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

GIL-14-022
October 9, 2014
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Consolidated Freight Charges
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXX (“Company”) a request for guidance to determine
whether or not consolidated freight charges are subject to sales or use tax.
The Colorado Department of Revenue (“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 Rule 24-35-103.5 at www.colorado.gov/revenue/tax > 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 Department Rule 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.
Issue
Are consolidated freight charges, if separately stated, subject to sales or use tax?
Background
Company is a provider of retail store fixtures, point of sale displays, workstations and cable trays.
Company handles each step of production from product design to quality testing. Company also
handles its own distribution operations.
Company is in the process of implementing a new charge (consolidated freight charge). Company
defines a consolidated freight charge as a charge for transporting the product from one of
Company’s facility to another Company facility for the purpose of consolidating a customer’s order
to ship from a single shipping point. The charge is calculated as a percentage of the invoice price
for the product to be transferred to another Company plant for shipping consolidation.

Discussion
Colorado levies sales and use tax on the sale, use, consumption, or storage of tangible personal
property. The purchase price paid by customers, on which sales tax is computed, includes all costs
incurred by the retailer in making a sale. Charges for services that are separable from the sale of
the taxable goods are not included in the sales tax calculation. Generally speaking, services that
occur after the product is brought to market are generally not included in the computation of tax.
A charge for transportation of tangible personal property between a retailer and a purchaser is
generally not included in the calculation of sales tax because the transportation service is rendered
after the product is brought to market. This type of transportation charge is generally referred to as
a drop shipment. Conversely, a charge for a transportation service rendered prior to the sale is
generally included in the computation of sales tax. For example, freight-in charges are typically
incurred in connection with transporting tangible personal property from the place of production or
manufacture to the seller or to the seller’s agent or representative, or to anyone else acting in the
seller’s behalf, either directly or through a chain of wholesalers or jobbers or other
middlemen. Because freight-in charges are for transportation services rendered prior to the sale,
these charges are generally included in the computation of sales tax.
If Company’s consolidated freight charge genuinely occurs after the product is purchased, then the
charge appears to be a drop shipment not subject to tax. However, if Company’s consolidated
freight charge is assessed regardless of whether a product is being purchased or before the
purchase is complete, then the charge appears to be a freight-in charge subject to tax.
More importantly, though, a transportation charge must fairly reflect the cost of transportation. This
requirement is imposed to prevent shifting some of the taxable purchase price to non-taxable
transportation charges. If the purchase price is not reflective of transportation costs, then the
Department will presume that the transportation charge should be included in the sales tax
calculation. Transportation costs generally vary based on weight, distance transported, size,
volume, delivery time, and other related factors. It is unclear how charging a flat percentage of the
total invoice price could properly reflect the cost of transporting / consolidating the customer’s
products to a single shipping point. Therefore, if Company’s consolidated freight charge does not
fairly reflect the cost of transportation, the consolidated freight charge is subject to tax.
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.colorado.gov/revenue/tax 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,
Office of Tax Policy
Colorado Department of Revenue
2

DR 4010A (06/11/14)