Is a separately stated processing fee added to small orders subject to Kansas sales and use tax?

Plain-English summary

A retailer added a flat processing fee to small orders - to recoup part of its office and handling costs - and set it out as a separate line item on the invoice. It asked whether that fee is subject to Kansas sales and use tax. The Department ruled that it is taxable.

The tax is measured by gross receipts. "Kansas sales tax is levied on a retailer's gross receipts. See K.S.A. 79-3603." The Department then quoted the two governing definitions from K.S.A. 79-3602: "Gross receipts" means "the total selling price or the amount received . . . from sales at retail within this state," and "Selling price" means "the total cost to the consumer exclusive of discounts allowed and credited, but including freight and transportation charges from retailer to consumer."

Separately stating the fee does not remove it from the tax base. Because the tax base is "the total cost to the consumer," the Department concluded that "part of the consumer's cost is your processing fee and shipping charges, even though these charges are separately stated line items on your invoice. The costs are, by definition, made part of the selling price and the taxable gross receipts."

The same rule applies to use tax. The Department noted that "the same rule applies for Kansas use tax" (the compensating tax), so the processing fee and shipping are in the base for both taxes.

Bottom line: a processing fee added to an order - like shipping and handling - is part of the taxable selling price and is subject to Kansas sales and compensating (use) tax, even when itemized separately on the invoice.

What this means for you

Retailers charging processing, handling, or shipping fees

Include your processing fee and your freight/shipping charges in the amount you tax. Kansas measures the tax on the total cost to the consumer, so breaking these charges out as separate line items does not make them exempt.

Both sales tax and use (compensating) tax

The Department applied the same rule to Kansas use tax. Whether the transaction is subject to sales tax or compensating use tax, the processing fee and shipping are in the taxable base.

The narrow exclusions are discounts and refunds/trade-ins

The selling price is figured "exclusive of discounts allowed and credited," and gross receipts allow credit for refunded returned property and trade-in allowances - but ordinary handling and freight charges stay in the base.

Common questions

Q: Is a separately stated processing fee taxable in Kansas?
A: Yes. The Department ruled that a processing fee is part of the total cost to the consumer and part of the taxable selling price, even when itemized separately on the invoice.

Q: What about shipping and handling charges?
A: They are taxable too. The statutory definition of "selling price" includes freight and transportation charges from the retailer to the consumer.

Q: Does this apply to use tax as well as sales tax?
A: Yes. The Department stated that the same rule applies for Kansas use (compensating) tax.

Citations and references

• K.S.A. 79-3603 - levies Kansas sales tax on a retailer's gross receipts.
• K.S.A. 79-3602 - defines "gross receipts" as the total selling price received from retail sales, and "selling price" as the total cost to the consumer (exclusive of discounts, but including freight and transportation charges from retailer to consumer). Because the tax base is the total cost to the consumer, a separately stated processing fee and shipping charges are part of the taxable selling price for both Kansas sales tax and Kansas use (compensating) tax.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-057

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

November 8, 2000

XXXX
XXXX
XXXX

RE: Your letter of October 20, 2000

Dear XXXX:

Your letter has been given to me to answer. In it, you ask if processing fees that you bill to customers on small orders are subject to Kansas sales and use tax. The processing fee is a flat charge added to small orders in order to recoup part of the office and handling expenses associated with small orders. You intend to set the fee out as a separate line item on the invoice. Please be advised that these charges are taxable.

Kansas sales tax is levied on a retailer’s gross receipts. See K.S.A. 79-3603. The act provides the following two definitions in K.S.A. 79-3602:

(h) "Gross receipts" means the total selling price or the amount received as defined in this act, in money, credits, property or other consideration valued in money from sales at retail within this state; and embraced within the provisions of this act. The taxpayer, may take credit in the report of gross receipts for: (1) An amount equal to the selling price of property returned by the purchaser when the full sale price thereof, including the tax collected, is refunded in cash or by credit; and (2) an amount equal to the allowance given for the trade-in of property. . . .

(g) "Selling price" means the total cost to the consumer exclusive of discounts allowed and credited, but including freight and transportation charges from retailer to consumer.

These definitions provide that the tax base is “the total cost to the consumer.” Part of the consumer's cost is your processing fee and shipping charges, even though these charges are separately stated line items on your invoice. The costs are, by definition, made part of the selling price and the taxable gross receipts. The same rule applies for Kansas use tax. I hope that this discussion answers all of your questions. If not, please call me and we can discuss them.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 11/13/2000 Date Modified: 10/10/2001

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