Determining the Correct Taxable Base for Sales Tax (Part 2)

Aside from the sales incentives, other charges and fees such as transportation costs and returns and allowances and bad debt can be easily overlooked by companies computing the taxable base of a transaction. And as with discounts (discussed in part 1), when dealing with multiple jurisdictions, the rules are not uniform.

Transportation

The majority of states tax transportation charges to the purchaser. Transportation charges can be defined differently state to state and could include in the definition: handling, packing, mailing/delivery, shipping, and postage costs. If an exclusion is allowed for transportation charges, the invoice must separately state the charges or it will default as being taxable.

Among the states, New York and Nebraska state that delivery charges are taxable when (1) the transaction with the retailer is taxable, and (2) the purchaser pays the delivery charge to the retailer. Note that the delivery charges in addition to the sale of the product are part of the retailer’s taxable sales base. If the transaction is nontaxable, any charge to the customer for shipping or delivery would not be subject to tax. Colorado and Illinois generally will not tax transportation costs if the amounts are agreed by the buyer and seller to be separately stated on the invoice.

Bad debt

As part of the normal process of doing business, companies often incur bad debt. Businesses may or may not know that sales tax reductions are generally allowed for taxes that have been paid to a jurisdiction on accounts deemed to be worthless. A state will normally allow the deduction for sales tax if the account is taken as a bad debt deduction for income tax purposes. If a recovery of bad debt occurs after the deduction was taken, the amount is subject to sales tax. Pursuant to the uniform provisions under the Streamlined Sales & Use Tax Agreement, bad debt does not include finance charges, interest and expenses incurred in the collection activity.

Most states allow a taxpayer to take a deduction against the current period’s tax base. Returns and allowances and defective products are treated similarly in that vendors are generally allowed a credit for the tax paid and remitted on taxable goods returned to the vendor.

Note that for defective merchandise, the deduction is limited to the sales price less the allowance. If the purchaser exchanges a defective product for a new one at equal value, no deduction is allowed by the vendor and no sales tax charged on the exchange.

Interest and Borrowing Fees

Most states do not tax finance charges or interest and carrying charges to sales made on credit as long as the amounts are separately stated.

Understanding and applying sales and use tax rules can be quite cumbersome for many business operating in multiple states. Determining the correct taxable base and deductions for sales and use tax reporting could be highly material to your business if done incorrectly. Are you confident in the accuracy of your sales and use tax compliance?

Contact our State and Local Tax team by clicking here or calling 716-847-2651 to get in touch with a member of the Freed Maxick SALT Team for a no cost consultation.