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Why is freight taxed partially on my sale?

Overview

You see that only a portion of the freight charge on your sale was taxable, and some of it was non-taxable on the same line, and you want to know why.

Environment

Avalara AvaTax

Resolution

  • In states which tax freight depending on the taxability of the items delivered you will see partial tax when the sale includes taxable and nontaxable physical goods and non-physical goods:

    • Value of taxable physical goods in relation to the entire portion of the sale which is physical goods is the percentage of the freight value which has tax applied

    • Non-physical items, such as services are not factored into the equation​

  • ​​Example: $10,000 sale with $100 in freight (taxed depends state) with tax rate of 10%. The sale includes:

    • ​​$5,000 in physical goods

      • ​​$3,000 is taxable

      • $2,000 is non-taxable

    • ​​$5,000 in services (non-physical goods)

    • Of the $5,000 of the sale which is physical goods, 60% is taxable, so tax will be calculated on 60% of the Freight charge

    • Tax on freight is $6.00 ($100.00 x 60% x 10% = $6.00)