Does use tax apply to shipping and handling charges in Indiana?

The short answer is, “Yes, since 2004, use tax does apply to shipping and handling in Indiana.” My research into the question is below.


There is a line on the Indiana income tax form (IT-40) called “Use tax on out-of-state purchases”.  It’s really hard to tell from the instructions and examples whether the transaction amount the use tax is assessed against includes shipping & handling charges or not.

Contents

1. Some nonconclusive examples
1.1. Closest example not close enough
1.2. A ruling from April 2004
1.3. The Indiana Administrative Code
1.3.1. Old Dates
2. Looks Like (At Least Since 2004) We Do Owe It: House Enrolled Act 1365
2.1. Where It Says that Use Tax is Based on the Gross Retail Income
3. My Conclusion

1. Some nonconclusive examples

1.1. Closest example not close enough

The article Your Use Tax Liability on the Indiana Department of Revenue website has this example:

A manufacturer purchases new office furniture for their corporate office use from an out-of-state distributor. The distributor collects their state’s 6% sales tax on the selling price. The manufacturer owes an additional 1% Indiana use tax on this purchase since the property is being used, stored or consumed within Indiana. The manufacturer should report this use tax liability on their ST-103 sales tax return.

But this example leaves an important question unanswered: did the manufacturer have the furniture shipped from the out-of-state distributor yet only owe the 1% additional use tax on the selling price (and not on any shipping charges), or did the manufacturer personally pick up the furniture from the out-of-state distributor so that there were no shipping charges?

1.2. A ruling from April 2004

There is a ruling from April, 2004 where an Indiana business protested having to pay tax on shipping and handling, but there it was not broken out into actual shipping charges and handling (called “preparation”) charges.  It seems clear from this ruling that for the period covered (2001-2003), the handling charges were taxable, but the shipping charges wouldn’t have been if they had been broken out separately. So already we can see that “shipping & handling” would be taxable if it’s lumped together like that.

This ruling would make me think that if the actual shipping charges are broken out separate from any handling charges, those shipping charges are non-taxable.  BUT, since this ruling seems to cover actions during the years 2001-2003 and in 2004 there was a change in Indiana use tax law (HEA 1365 of 2004, which we’ll take a look at later in this post), I don’t think we can rely on this ruling to show how things work now.

1.3. The Indiana Administrative Code

There’s also some information in the Indiana Administrative Code.  Title 45 IAC Article 2.2 Sales and Use Tax, Rule 4, “Retail Transactions of Retail Merchant”, has this at 45 IAC 2.2-4-1 “Selling at retail; application”:

Sec. 1. (a) Where ownership of tangible personal property is transferred for a consideration, it will be considered a transaction of a retail merchant constituting selling at retail unless the seller is not acting as a “retail merchant”.
(b) All elements of consideration are included in gross retail income subject to tax. Elements of consideration include, but are not limited to:
(1) The price arrived at between purchaser and seller.
(2) Any additional bona fide charges added to or included in such price for preparation, fabrication, alteration, modification, finishing, completion, delivery, or other services performed in respect to or labor charges for work done with respect to such property prior to transfer.
(3) No deduction from gross receipts is permitted for services performed or work done on behalf of the seller prior to transfer of such property at retail.
(Department of State Revenue; Ch. 4, Reg. 6-2.5-4-1(b)(010); filed Dec 1, 1982, 10:35 am: 6 IR 16)

(Bolded emphasis mine.)  So delivery prior to transfer of ownership to the buyer would be taxable… And then a couple of sections later there’s this at 45 IAC 2.2-4-3 “Selling at retail; delivery charges”:

Sec. 3. (a) Separately stated delivery charges are considered part of selling at retail and subject to sales and use tax if the delivery is made by or on behalf of the seller of property not owned by the buyer.
(b) The following guidelines have been developed:
(1) Delivery charge separately stated with F.O.B. destination–taxable.
(2) Delivery charge separately stated with F.O.B. origin–non taxable.
(3) Delivery charge separately stated where no F.O.B. has been established–non taxable.
(4) Delivery charges included in the purchase price are taxable.
(c) Two considerations must always be kept in mind in applying these guidelines:
(1) The rules do not override established interstate commerce exemptions recognized by IC 6-2.1-3-3 (see 6-2.5-5-24(b)(010)[45 IAC 2.2-5-54]).
(2) The rules are only applicable in determining whether or not the delivery charge of an otherwise taxable sale is also subject to sales or use tax.
(Department of State Revenue; Ch. 4, Reg. 6-2.5-4-1(e)(010); filed Dec 1, 1982, 10:35 am: 6 IR 16; filed Aug 6, 1987, 4:30 pm: 10 IR 2613)

(Again, bolded emphasis mine.)  Wikipedia explains the North American usage of the term F.O.B. this way:

“FOB origin” indicates the buyer pays shipping cost, and takes responsibility for the goods when the goods leave the seller’s premises. “FOB destination” designates the seller will pay shipping costs, and remain responsible for the goods until the buyer takes possession.

So again, it looks like if the actual delivery charges are separated out and no statement is made that the goods still belonged to the seller during shipment, those actual delivery charges would be non-taxable… except…

1.3.1. Old Dates

The dates on these entries, 45 IAC 2.2-4-1 and 4-3, are 1982 and 1987.  It really smells like these entries have not yet been updated to take into account that amendment to sales/use tax law we mentioned before, that happened in 2004: House Enrolled Act 1365…

2. Looks Like (At Least Since 2004) We Do Owe It: House Enrolled Act 1365

HEA 1365 (which the Indiana law blog equates with PL 81-2004) Section 2 modified IC 6-2.5-1-5 “Gross retail income” to add the wording I’ve bolded below:

Sec. 5. (a) Except as provided in subsection (b), “gross retail income” means the total gross receipts, of any kind or character, received in a retail transaction, including cash, credit, property, and services, for which tangible personal property is sold, leased, or rented, valued in money, whether received in money or otherwise, without any deduction for:
(1) the seller’s cost of the property sold;
(2) the cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the seller;
(3) charges by the seller for any services necessary to complete the sale, other than delivery and installation charges;
(4) delivery charges; or
(5) the value of exempt personal property given to the purchaser where taxable and exempt personal property have been bundled together and sold by the seller as a single product or piece of merchandise.
For purposes of subdivision (4), delivery charges are charges by the seller for preparation and delivery of the property to a location designated by the purchaser of property, including but not limited to transportation, shipping, postage, handling, crating, and packing.

And subsection (b) doesn’t have any exceptions that apply in our case. (Skeptical? Check for yourself!)

So you can’t deduct delivery charges from the gross retail income, and delivery charges seem to include both the handling and the actual shipping charges.  This seems to pretty clearly show that the gross retail income now includes not only any handling charges, but also actual shipping or postage charges, whether or not these are broken out separate from the selling price of the goods sold.

2.1. Where It Says that Use Tax is Based on the Gross Retail Income

One more point to clarify: how do we know that the “Gross Retail Income” is thing that we owe use tax on?

We see the mapping of gross retail income to use tax in IC 6-2.5-3-3 “Rates; certain transactions defined”:

Sec. 3. The use tax is measured by the gross retail income received in a retail unitary transaction and is imposed at the same rates as the state gross retail tax under IC 6-2.5-2-2…

(Emphasis mine.)

3. My Conclusion

I’m not a lawyer, but I’m pretty well convinced that I owe Indiana use tax on both the purchase price and shipping and handling of my out-of-state purchases.

Check my logic.  Did I miss something?

Further confirmation, 1/23/2009: My Dad asked about this at the Department of Revenue office in Fort Wayne, and they pointed him to Commissioner’s Directive #23, Delivery and Installation Charges Subject to Indiana Sales and Use Tax (PDF).  Part III, “Delivery Charges”, begins:

Delivery charges are included in gross retail income and subject to tax regardless of shipping terms. Delivery that is made by or on the behalf of the seller of tangible personal property will be taxable whether or not the delivery charge is separately stated.

The Introduction section of this same Directive says:

Effective January 1, 2004, Indiana enacted legislation to bring Indiana’s sales and use tax statutes into conformity with the Streamlined Sales and Use Tax Agreement. A further change was made effective March 18, 2004 by HEA 1365-2004.

I searched for Streamlined Sales Tax on the in.gov website and found the Streamlined Sales Tax page.  Linked from there is a Taxability Matrix (PDF) — cool name, huh? — in which I found the following information:

Administrative Definitions Treatment of definition Reference
Sales price Identify how the options listed below are treated in your state.
The following options may be excluded from the definition of sales price only if they are separately stated on the bill to the purchaser.
Included in sales price Excluded from sales price Statute/Rule Cite
Charges by the seller for any services necessary to complete the sale
other than delivery and installation
X IC 6-2.5-1-5(a)(3)
Delivery charges including direct mail X See IC 6-2.5-1-5(a)(4)
Delivery charged excluding direct mail X

The instructions say, “The following options may be excluded from the definition of sales price only if they are separately stated on the bill to the purchaser”, I’m not sure what all the categories mean, but I see that both Delivery charges including direct mail and Delivery charged [sic] excluding direct mail are marked as included in sales price. Even if the Excluded box were checked, that would mean (according to those instructions just mentioned) that delivery charges could be excluded from the sales price if they are broken out separately on the bill.  That all three categories have Included in sales price checked just confirms for me that in Indiana we do owe sales/use tax on shipping and handling, even if it’s broken out to a separate line item on the bill.

This entry was posted in Indiana law. Bookmark the permalink.

2 Responses to Does use tax apply to shipping and handling charges in Indiana?

  1. danielmeyer says:

    Thanks for the heads up, Calvin!

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