December 27, 2004

ALLOCATION OF DELIVERY CHARGES TO COMBINED SHIPMENTS OF TAXABLE AND NON-TAXABLE PRODUCTS

In determining sales price or purchase price when computing sales or use tax due, how are delivery charges to be addressed when a shipment includes both exempt property and taxable property?

In determining sales price or purchase price when computing the sales or use tax due, if a shipment includes both exempt property and taxable property, the seller should allocate the delivery charge by using:

1. a percentage based on the total sales prices of the taxable property compared to the total sales prices of all property in the shipment, or;
2. a percentage based on the total weight of the taxable property compared to the total weight of all property in the shipment.

The seller must tax the percentage of the delivery charge allocated to the taxable property but is not required to tax the percentage allocated to the exempt property.

DISCUSSION

Michigan has participated in the Streamlined Sales and Use Tax Project and, with passage of the Streamlined Sales and Use Tax Administration Act (2004 PA 174, MCL 205.801 et. seq.), anticipates becoming a "member state" under the Streamlined Sales and Use Tax Agreement ("Agreement").

Under the General Sales Tax Act ("GSTA"), sales tax is calculated based on sales price. Under the Use Tax Act ("UTA"), use tax is calculated based on purchase price. The GSTA and the UTA define "sales price" and "purchase price," respectively, identically as including delivery charges incurred or to be incurred before the completion of the transfer of ownership to tangible personal property from the seller to the purchaser. MCL 205.51(1)(d), MCL 205.92(f). These statutory definitions include, without limitation, "transportation, shipping, postage, handling, crating, and packing." Neither the GSTA nor the UTA indicate how the amount of delivery charges to be included in "sales price" or "purchase price" is to be determined when the delivery of the subject tangible personal property is made in a shipment that includes both exempt and taxable property.

The Agreement, in its administrative definition of "delivery charges," indicates that if a shipment is comprised of both taxable and exempt property, the seller should allocate the delivery charge based either on the percentage of total sales prices of the taxable property compared to the total sales prices of all property in the shipment or on the percentage of total weight of the taxable property compared to the total weight of all property in the shipment.

Given that the GSTA and the UTA are silent on this issue, and in view of the administrative definition of "delivery charges" contained in the Agreement, the Department will interpret both the GSTA and the UTA as permitting the allocation of delivery charges when a shipment contains both exempt and taxable tangible personal property.