In recent years, the shift from brick-and-mortar retailers to the digital marketplace has spurred innovations but also some headaches for consumers and businesses alike. Now, more than ever, consumers are likely to shop online rather than go to a physical store. As a result of this transition, states are beginning to recognize potential sources of revenue that are more complex and nuanced than what their tax laws have addressed in the past. This follows one of the most significant changes in the sales and use tax legal landscape, with the U.S. Supreme Court upholding the constitutionality of economic nexus in South Dakota v. Wayfair in 2018.

Under economic nexus, a state can enforce its sales and use tax laws against an out-of-state retailer that has exceeded a certain threshold of transactions or sales within its borders. Before Wayfair, states were limited to enforcing sales and use tax collection obligations against retailers that maintained a physical presence (e.g., property or employees) within their jurisdiction.

The rise of economic nexus has enabled state and local tax authorities to pursue new sources of revenue by taxing previously untaxable transactions due to a retailer's lack of a physical presence in the state. While this has been a dramatic shift, there are additional areas that state and local tax authorities are now reviewing to determine if, similar to pre-Wayfair tax rules and regulations, other potential tax revenue streams are going unnoticed. A key target for several jurisdictions is the tax treatment of services such as shipping, handling, and, most recently, delivery.

Identifying and complying with changes to the state tax treatment of shipping, handling, and delivery charges is difficult for taxpayers because it is not being driven by a singular event such as Wayfair, which unified states to adopt a new rule. Instead, each state individually determines how to treat these services. As a result, the states are inconsistent in the timing and roll-out of changes to their tax rules and regulations, as well as the definitions each state uses. Most recently, no doubt partly driven by the proliferation of the gig economy, some states have begun imposing an additional tax on delivery fees, such as last-mile delivery, which focuses on the transport of goods from a warehouse to the final delivery destination. Below are some examples of how these taxes are being imposed in Michigan, Colorado, and Minnesota, including the nuances and differences between these levies.

Michigan

Michigan changed its sales and use tax treatment of separately stated delivery fees, effective April 26, 2023, with the enactment of Public Acts 20 and 21 of 2023. The new law exempts delivery or installation charges if they are both separately stated on the invoice and the seller maintains their books and records to show separately the transactions for both the purchase of the property being delivered and the delivery charge itself. While there are exceptions to this requirement, such as delivery charges associated with the sale of electricity, natural gas, or other artificial gas by a utility, the new law is a significant departure from the existing rules that treated all delivery charges as taxable unless specifically associated with exempt property. The change is intended to reduce ambiguity about when tax is due. Previously, tax was deemed to be due when the transfer of title to the delivered property occurred. Additionally, shipping charges on mixed goods remain exempt on the portion allocable to the delivery of exempt goods, even when not separately stated. However, it is a best practice to separately state delivery charges into Michigan.

The new law generally benefits taxpayers because it allows them to reduce their sales tax collection and remittance obligations as a seller, as well as lower the cost to their customers when charges are separately stated. However, certain compliance obligations must be met to receive this benefit. The new compliance requirement is likely to fall most heavily on out-of-state sellers who may not know about the new law and had previously billed under a lump sum. Such sellers may receive pushback from customers seeking to reduce their tax burden. This would result in the change of invoicing, purchase order issuance, and other administrative functions where the onus is on the seller to update their systems.

Colorado

Colorado began imposing a retail delivery fee, which is separate from their sales and use tax, effective July 1, 2022, with the enactment of S.B. 21-260 in 2021. The legislation aims to generate additional revenue to offset the rising costs to the transportation infrastructure as a result of the rapid increase in the volume of deliveries being made within the state, while simultaneously not overburdening smaller businesses. The fee was intended to only apply to those taxpayers who would not be overburdened by the higher administrative cost. However, this measure, unlike the one adopted by Michigan, results in an increase in the cost of doing business for taxpayers engaged in delivery services within Colorado. Exemptions to this delivery fee include delivery of goods that are exempt from state sales tax (including sales for resale/wholesale purchases) as well as delivery to an exempt purchaser.

The delivery fee imposed by Colorado is an amalgamation of other, more specific fees to be levied by state enterprises focused on initiatives such as alternatives to gas vehicles, bridge and tunnel maintenance, community access, and air pollution, which are collected as the enterprise retail delivery fee to reduce the administrative burden on both the state and the taxpayer. Unlike Michigan's allocable exempt delivery costs, when delivery is not separately stated, the Colorado rules relegate the entire cost of shipping the goods to be subject to the delivery fee.

Minnesota

In Minnesota, delivery charges are taxable even when separately stated. Similar to Michigan, there is an allowance for the exemption of delivery charges associated with exempt property, and Minnesota specifically provides the option to allocate exempt separately stated shipping by either a percentage of the total sales price or by a percentage of the total weight, relative to the respective price or weight of the exempt good(s) being delivered.

Separate and aside from the imposition of sales and use taxes upon delivery charges, Minnesota, like Colorado, has also enacted a measure (HF 2887) to impose a retail delivery fee for the privilege of delivering goods within the state, which takes effect July 1, 2024. This adds an additional element to delivery charges because the seller will have the authority, but not the obligation, to collect the delivery fee from its customer, which is levied at a rate of 50 cents on each transaction equal to or exceeding the applicable threshold amount depending on the year, which is $100 for sales in 2024 once the statute becomes effective. To exclude this additional fee from the taxable sales price, it must be separately stated and explicitly noted as "road improvement and food delivery fee" on the invoice.

The Takeaway

As demonstrated by the discussion of recent law changes in Michigan, Colorado, and Minnesota, both determining the correct sales and use tax to collect as well as if any additional excise fees apply, creates an additional compliance burden on businesses. Andersen's State and Local Tax (SALT) Team is monitoring developments regarding the state tax treatment on charges related to the transportation and delivery of tangible personal property. Reach out to a member of the SALT Team to find out how these taxes may be impacting your business.