Taxed on Shipping

by Kristina Rasmussen The next time you make a major purchase online, keep your eye on the tax bill. Thanks to a little-known aspect of Illinois’s tax code, shipping charges may be subject to sales taxes. That’s right, you could be getting taxed on shipping. Today’s Chicago Tribune highlights how sales taxes must be applied on shipping fees above...

by Kristina Rasmussen

The next time you make a major purchase online, keep your eye on the tax bill. Thanks to a little-known aspect of Illinois’s tax code, shipping charges may be subject to sales taxes. That’s right, you could be getting taxed on shipping.

Today’s Chicago Tribune highlights how sales taxes must be applied on shipping fees above and beyond the actual cost of an item. So if Target charges me $20 for shipping, but the actual mailing costs was only $12, I have to pay sales taxes on the remaining $8. Yikes.

Another oddity to Illinois’s tax code: if an online retailer has a brick-and-mortar presence in Illinois, the sales tax is calculated on where the order is processed, not delivered (take note, Chicago residents!). Many other states use destination sourcing for tax purposes, with the point of delivery (i.e., a home) used to calculate taxes.

Seemingly strange quirks in the tax code are a direct result of our federalist style of government. When you give jurisdictions the freedom to innovate, you’re going to end up with varying policy solutions in different parts of the country. Some will be good, some with be bad. I think the freedom is good thing, especially as competition among ideas — where bad ideas are weeded out — benefits everyone. Attempts to shoehorn states and localities into one “streamlined” solution should be viewed with caution. Cartels don’t work well for consumers or taxpayers.