Retail Sales and Use Tax
Basis of tax; Delivery charges and packing costs; Insurance charges
Taxability of Persons and Transactions
February 18, 1997
Re: §58.1-1821 Application: Retail Sales and Use Tax
In your letter of January 7, 1997, you seek correction of the sales and use tax audit assessment issued to ****************(the Taxpayer).
The Taxpayer is an out-of-state retailer registered for the collection and remittance of the Virginia use tax. An audit for the period October 1993 through July 1996, resulted in an assessment of use tax on untaxed shipping and handling charges.
The Taxpayer takes exception with the tax assessed on the lump-sum charges for shipping and handling. The Taxpayer maintains that these charges only represent charges for "freight and insurance" and that there are no handling charges included. According to the Taxpayer, it bills its customers for handling charges as either part of the product price or as a separate line item upon which the tax is charged. The Taxpayer recognizes that the term "shipping and handling" is not totally accurate in describing these costs, but it is reluctant to change the term because of industry convention and not wanting to upset its customers by changing the wording on its invoices. The Taxpayer requests waiver of tax assessed on these charges.
The Taxpayer also requests that its 1995 corporate income tax carryover of $906.58 applied to this assessment be restored to the 1996 tax year.
Code of Virginia § 58.1-609.5(3) provides an exemption from the retail sales and use tax for separately stated transportation charges. Virginia Regulation 630-10-107 defines "transportation or delivery" charges" as "charges for delivery from the seller to the purchaser, commonly known as transportation-out, and include postage or common carrier charges. Transportation and delivery charges do not include charges from a manufacturer to a retailer's place of business relative to purchases for resale, nor do they include handling charges." (Emphasis added.)
Although "handling charges" are not defined in the regulations or the statute, l would consider handling charges as consisting of those handling activities which must be completed before the packaged item is placed in transportation, such as, picking, stock handling, scanning, packing, metering, and loading the goods for shipment. Handling would also include those activities associated with receiving and warehousing goods, inspection, storage, and repacking the goods in preparation for shipment. As such, handling charges do not include insurance charges.
Although an insurance charge does not represent a charge for the "actual" delivery or transportation of the product to the customer, l find that an insurance charge for the protection of the seller or purchaser against a monetary loss in case the goods are damaged or lost during shipment to the customer is an element of transportation. Accordingly, an insurance charge which only insures the goods during shipment from the seller to the purchaser is exempt from the tax when separately stated on the customer's invoice as "shipping insurance" or combined with the actual shipping, freight, delivery or transportation charge and billed as a "freight and insurance" charge or as a "shipping and insurance" charge.
In the prior audit, a determination was made that the Taxpayer's shipping and handling charges were nontaxable "freight and insurance" charges, even though the Taxpayer invoiced them as "shipping and handling" charges. Relying on the determination made in the prior audit, the Taxpayer has not been charging sales tax on charges labeled as "shipping and handling."
Although lump-sum "shipping and handling" charges are taxable, l will agree to waive the tax and interest assessed on such charges for this audit only. For the future, the Taxpayer is expected to charge and collect the Virginia sales and use tax on any charges labeled as "shipping and handling."
Based on the foregoing, bill number **** has been abated in full and the Taxpayer's 1995 corporate income tax carryover of ******** will be applied to the 1996 tax year. If you have any questions about this matter, please contact******* at*********** .
Danny M. Payne