Massachusetts Rules Freight Insurance Charges Are Taxable
Friday, April 19th, 2013
The Massachusetts Department of Revenue (DOR) recently ruled that separately stated freight insurance charges are not transportation charges; rather, they are part of the gross receipts of sales of tangible personal property and are subject to sales tax. Mass. Ltr. Rul. 13-4 (Dept. of Revenue Mar. 27, 2013).
The business that requested the ruling is a supplier that routinely ships goods to customers via common carrier and automatically adds separately stated charges for freight insurance to those sales. While customers have the option of choosing a common carrier they prefer and waiving the insurance, most customers default to the options arranged for by the supplier. The supplier requested the ruling to determine whether the separately stated freight insurance charges are subject to sales tax.
In Massachusetts, transportation charges are excluded from the taxable "sales price" of tangible personal property when (1) the charges are separately stated and (2) the transportation occurs after the sale of the property is made. Mass. Gen. Laws ch. 64H sec. 1 ("Sales price"). In other words, separately stated charges for transporting tangible personal property after it has been sold are not subject to tax. So, to determine whether the separately stated freight insurance charges are subject to sales tax, the DOR had to determine whether the freight insurance charges are, in fact, transportation charges.
Citing an earlier directive, the DOR explained that its current policy is that any transportation charge that meets all three of following requirements is not subject to tax: (1) It reflects a cost of preparing and moving the goods to a location designated by a retail customer; (2) it is separately stated on the invoice to the customer (not merely on the internal books and records of the vendor), and (3) it is set in good faith and reasonably reflects the actual costs incurred by the vendor. Mass. Directive 04-5 (Dept. of Revenue July 7, 2004). The DOR further explained that "transportation charges" are defined as charges by the seller of tangible personal property for the preparation and delivery of goods to a location designated by the purchaser. According to the DOR, "transportation charges include 'postage,' 'freight,' 'shipping,' 'handling,' 'transportation,' 'shipping and handling,' crating, packing or the like."
The DOR distinguished freight insurance--which protects against the financial loss resulting from damage or loss--from charges for activities that are necessary to prepare the goods for safe shipment and move the goods to the location selected by a buyer. Consequently, the DOR rejected the supplier's claim that freight insurance qualifies as a transportation cost that could be excluded from the "sales price" subject to Massachusetts sales tax.
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