On September 23, 2015, the Michigan Department of Treasury issued Revenue Administrative Bulletin 2015-17 relating to the sales tax treatment of delivery services provided by retailers. The issuance of the Bulletin clarified when certain delivery charges would not be taxable pursuant to the Michigan Sales Tax Act if a retailer was engaged simultaneously in the sale of goods and materials that would be subject to the 6% sales tax.
The General Sales Tax Act provides that a 6% sales tax is levied on the “gross proceeds” of a business from all persons engaged in the business of making sales at retail. The Act defines “gross proceeds” as “sales price” which can include, among other things, delivery charges in some instances.
As long as the retailer can establish that it operates a simultaneous delivery service, it will be exempt from having to pay the 6% sales tax for these delivery services if it meets certain factors. The Department will consider all facts and circumstances of the transfer of ownership of the property to determine if delivery charges are taxable, including, but not limited to:
1. Whether the customer has the option to either pick up the property or have the property delivered;
2. Whether the delivery charge is separately negotiated and contracted on a competitive basis;
3. Whether the property and delivery charges are separately invoiced;
4. Whether the taxpayer’s books and records separately identify the transactions used to determine the tax on the sale at retail;
5. Whether delivery service records indicate a net profit (i.e., the delivery service is a commercial endeavor separate from the retail business);
6. The time at which risk of loss transfers from seller to buyer;
7. The time at which title to the property passes from seller to buyer; and
8. Any other information that is relevant in determining when ownership transfers.
None of the above factors, standing alone, conclusively determines the taxability of the delivery charges; the Department is supposed to consider the entire transaction when making its determination.
The key to the Department’s overall determination as to whether or not sales tax would be owed for delivery services is whether ownership of the property is transferred before or after delivery charges are incurred.
Delivery charges are “incurred” when the purchaser becomes legally liable for the charge. The dispositive determination is, when the delivery charges were incurred, not necessarily when the actual act of delivery occurs.
Examples:
1. AGG Inc. a retail seller of aggregate materials makes a sale of material to a customer. When the customer makes the purchase from AGG, it may either arrange for its own delivery or AGG, for an additional cost, will provide delivery of the material. If the customer chooses AGG for delivery, the customer and AGG enter into a separate contract after the sale of the materials, which passed all rights of title and ownership of the material to the customer. Because the delivery charge is incurred after the transfer of ownership of the materials, the delivery charge is not taxable.
2. AGG Inc. a retail seller of aggregate materials makes a sale of material to a customer. When the customer makes the purchase from AGG, it may either arrange for its own delivery or AGG, for an additional cost, will provide delivery of the material. If the customer chooses AGG for delivery, no separate contract is entered and the delivery charges are itemized as “Shipping and Handling” on the same invoice as the material. Under the terms of the sale the risk of loss remains with AGG until the material is delivered, and the customer pays the entire invoice at the time of purchase. Because the delivery charge is incurred before the completion of transfer of ownership, the delivery charge is taxable.
A variation of this example with different tax implications would be if the seller’s invoice included the term “FOB (Freight on Board or Free on Board) origin”. Under this invoicing scenario all rights of title and ownership of the material are passed to the customer at the point of sale. Because the delivery charge is incurred after the transfer of ownership of the materials, the delivery charge is not taxable.
3. AGG Inc. a retail seller of aggregate materials makes a sale of material to a customer. When the customer makes the purchase from AGG, it may either arrange for its own delivery or AGG, for an additional cost, will provide delivery of the material. If the customer chooses to arrange for its own delivery, the customer completes the sales transaction with AGG, which passes all rights of title and ownership of the material to the customer. The customer then arranges for delivery with its own truck or enters into a separate contract for delivery with another trucking company. Because the delivery charge is incurred after the transfer of ownership of the materials, the delivery charge is not taxable.
In closing, if you are engaged in the retail sale of property and simultaneously operate a delivery service, the cleanest way to avoid potential tax liability on your “delivery charges” is to structure your business as two separate entities with separate invoices, records and books.
To view the Michigan Department of Treasury’s Revenue Administrative Bulletin 2015-17 click here.
If you have any questions contact Glenn at glennbukoski@mi-ita.com or Rachelle at rachellevandeventer@mi-ita.com or call them at
