Could invoice lines labeled shipping and handling be exempt if they actually represented only common-carrier delivery?

Plain-English summary

Virginia gave the company one final chance to prove that charges labeled “shipping and handling” were actually exempt shipping only. Separately stated transportation from the seller to the buyer could be exempt, but handling was taxable.

When one lump-sum line combined exempt freight and taxable handling, the whole charge was ordinarily taxable. Prior rulings allowed taxpayers to remove or segregate freight when supplier letters or other records proved the actual components.

The pipe manufacturer said third-party carriers performed delivery and that any markup was not handling, but supplied no documentation. Because it was the first audit, Virginia returned the matter for a final review. Failure to provide records within 30 days after auditor contact would leave the assessment in place.

What this means for you

• Label freight and handling separately when possible.
• Keep carrier invoices and vendor statements supporting each amount.
• A misleading invoice label can be overcome, but only with records.
• Meet the final audit-document deadline.

Citations and references

• Va. Code § 58.1-609.5(3).
• 23 VAC 10-210-6000.
• Virginia Public Documents 96-119 (June 4, 1996), 97-79 (February 18, 1997), and 08-74 (June 16, 2008).

Subject

Assessment of tax on combined shipping and handling charges

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-126

Original ruling text

July 6, 2011

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This reply is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period April 2007 through July 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer manufactures and distributes pipes. An audit by the Department resulted in the assessment of tax on combined shipping and handling charges. The Taxpayer contends that the charges are mislabeled on the invoices and are for shipping only.

DETERMINATION

Virginia Code § 58.1-609.5 3 provides an exemption for separately stated transportation charges. Title 23 of the Virginia Administrative Code 10-210-6000 defines transportation charges as those charges for delivery from the seller to the purchaser, also described as "transportation-out," including postage or common carrier charges. The regulation further states that transportation charges do not include transportation charges from a manufacturer to a retailer's place of business for resale, nor do they include handling charges.

Public Document (P.D.) 96-119 (6/4/96) discusses a taxpayer that was assessed use tax on combined freight and handling charges. The Taxpayer presented letters from its suppliers that segregated the shipping charges. Although the Tax Commissioner confirmed that the combined charge of exempt shipping and taxable handling rendered the entire charge taxable, the Department agreed to remove the shipping portion from the assessed charges based on vendor statements. Also see P.D. 08-74 (6/16/08).

In P.D. 97-79 (2/18/97), a taxpayer was assessed tax on lump-sum shipping and handling charges. The determination concludes that although the Taxpayer invoiced the charges as "shipping and handling," the amounts were exempt freight and insurance charges. The Tax Commissioner agreed to remove the "shipping and handling" charges from the audit.

The Taxpayer argues that the invoiced shipping and handling charges are for shipping services only that are provided by third party common carriers. Additionally, the Taxpayer states that any amount it charges above its shipping costs are not for handling, as those costs are included in the sales price of the product. However, the Taxpayer presents no documentation to support its position.

Notwithstanding the foregoing, in accordance with the cited public documents and because this matter involves a first audit of the Taxpayer, I will allow the Taxpayer one final opportunity to provide documentation supporting its position. The audit will be returned to the audit staff, who will contact the Taxpayer to schedule a mutually convenient time to review the requested documentation. If no additional documentation is provided within 30 days of the date the audit staff contacts the Taxpayer, the assessment will be upheld as issued. In that event, an updated bill, with interest accrued to date, will be mailed to the Taxpayer and collection action will resume.

The Code of Virginia , regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4603108497.M