If a retailer charged sales tax on mandatory shipping and a customer returns the goods for a full refund of the item price but not the shipping, must the retailer refund the sales tax it collected on the shipping charge?
Plain-English summary
A retailer sells taxable goods and charges mandatory shipping — the customer can't opt out and arrange their own delivery. Because the shipping is mandatory (and not separately stated as optional), Colorado folds it into the taxable price, so the retailer collects sales tax on the goods and the shipping. The question: when a customer returns the goods and gets a refund of the item price but not the shipping, does the retailer have to refund the sales tax it collected on the shipping?
The Department's answer is yes. Here's the logic. Colorado taxes the full purchase price, and a mandatory shipping charge is part of that price (§ 39-26-102(12); Special Regulation Sales 18). But the reason shipping was taxable in the first place is that it was bound up with the taxable sale of the goods. Once the retailer refunds the full purchase price of the goods (the refund mechanism in § 39-26-102(5)), that taxable sale is unwound — and the leftover shipping charge "becomes a separate and separable transaction." A standalone shipping/transportation charge, divorced from a taxable goods sale, is not taxable. So the retailer must refund the sales tax it had collected on the shipping, even though it's keeping the shipping fee itself.
The key trigger is the full refund of the item's purchase price. That's what severs the shipping from the taxable sale and strips its taxability.
What this means for you
Online and catalog retailers
If you tax mandatory shipping (correctly, because it's mandatory) and a customer later returns the merchandise for a full refund, don't stop at refunding the item's tax. You also owe back the sales tax you collected on the shipping — even when your policy is to keep the shipping fee itself. Build that into your returns and refund logic so you're not over-remitting tax the customer is entitled to recover.
Bookkeepers and tax compliance staff
The taxability of the shipping charge is contingent on the underlying goods sale. A full-price return collapses that contingency: the shipping turns into a standalone, non-taxable transportation charge. Make sure your point-of-sale or e-commerce platform refunds tax on retained shipping when it processes a full-price return, and that the corresponding tax is backed out of what you remit.
Accountants and tax professionals
Two statutes drive this: § 39-26-102(12) (mandatory/non-separated shipping is in the price) and § 39-26-102(5) (refund of the full purchase price). The Department's move is to treat the full refund as making the shipping "separate and separable," which is what makes a standalone delivery charge non-taxable. Watch the home-rule-city caveat — self-collected cities set their own rules on delivery charges and refunds.
Common questions
Q: Is mandatory shipping taxable in Colorado?
A: Yes. Shipping charges are included in the sales tax calculation when they are mandatory or not separately stated on the invoice. (Optional, separately stated delivery can be different.)
Q: A customer returned an item for a full refund but I'm keeping the shipping fee. Do I refund the tax on shipping?
A: Yes. The Department says once you refund the full purchase price of the goods, the shipping charge becomes a separate, non-taxable transaction, so you must refund the sales tax collected on it.
Q: What if I only give a partial refund of the item price?
A: This letter addresses a refund of the full purchase price, which is what makes the shipping separable. A partial refund doesn't clearly trigger the same result, so analyze it on its own facts.
Q: Can I rely on this letter for my store?
A: Only as general guidance. A General Information Letter is not binding on the Department and makes no specific determination. For a binding answer on your facts, request a private letter ruling.
Citations and references
Statutes and rules:
- § 39-26-104(1), C.R.S. (imposition of sales tax)
- § 39-26-102(12), C.R.S. (purchase price; mandatory/non-separated shipping is included)
- § 39-26-102(5), C.R.S. (refund of full purchase price)
- 1 CCR 201-5, Special Regulation Sales 18 ("Transportation Charges")
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-16-005.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-16-005
May 11, 2016
XXXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Re: Refunds
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXX ("Company") a request for guidance to determine on what
amount a refund should be made when a shipping charge is mandatory and not refunded.
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 1 CCR 201-1, 24-35-103.5.
The Department treats your request as one of a general information letter. 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. If
you would like the Department to issue a private letter ruling on the issues you raise, you
must submit a new request and provide the fee in compliance with Department Rule 1 CCR
201-1, 24-35-103.5.
Issue
Must a retailer refund sales tax paid on charges for shipping if the retailer does not refund the
shipping charge?
Background
Retailer sells taxable goods and ships the goods to customers. The shipping charges are
mandatory because customers do not have the option of providing their own shipping.
Retailer calculates sales tax on the price of the goods and the shipping charge. If a customer
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returns goods for a refund, retailer will provide a refund of the purchase price for the goods
but not for shipping.
Structure of Analysis
To determine whether to refund the sales tax paid on shipping charges, the Department will
examine the following questions:
1) Is the item taxable under§ 39-26-104(1), C.R.S.?
a) Is the item tangible personal property sold or purchased at retail?
b) If the item is not purely tangible personal property, does the item contain both
potentially taxable and nontaxable elements?
i)
If it contains both potentially taxable and nontaxable elements, are the
nontaxable service components and taxable tangible personal property
separable and separated?
2) Does the retailer refund the full purchase price of the taxable good pursuant to § 39-26102(5), C.R.S.?
Discussion
Colorado levies sales tax on the sale of tangible personal property. Charges for services are
generally not subject to sales tax, with some exceptions. Sales tax is calculated on the full
purchase price paid by the buyer.1 Charges for shipping are included in the sales tax
calculation if the charges are mandatory or not separately stated on the invoice.2 Company
represents that it includes shipping charges in the sale tax calculation because the charges
are mandatory.
When a retailer refunds to the buyer the full purchase price for the tangible personal property,
the shipping charge becomes a separate and separable transaction. As such, the shipping
charge is no longer taxable and the retailer must refund the sales tax paid on the shipping
charge.
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/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
1
2
§§ 39-26-104(1) and 102(12), C.R.S.
I CCR 201-5, Special Regulation Sales 18, "Transportation Charges"
2
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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
3
DR 4010A (06/11/14)