Revenue Administrative Bulletin 2023-16

Sales Tax and Use Tax—Taxability of Delivery and Installation Charges

Approved: September 11, 2023

(Replaces Revenue Administrative Bulletin 2015-17)

Note: A taxpayer may rely on this Revenue Administrative Bulletin (RAB) until it is revoked by Treasury or until a law on which this RAB is based is altered by legislation or by binding judicial precedent. See MCL 205.6a and RAB 2016-20.

RAB 2023-16.  The General Sales Tax Act, MCL 205.51 et seq., and the Use Tax Act, MCL 205.91 et seq., are complementary tax laws that levy a tax on the sale, use, storage, or consumption of “tangible personal property.” Under those acts, the tax base is the property’s “sales price” or “purchase price,” which includes, in some circumstances, “delivery charges” and “installation charges.”

Effective April 26, 2023 (the “effective date”), the GSTA and the UTA were amended by Public Acts 20 and 21 of 2023 (the “amendatory acts”). Those amendatory acts changed the tax treatment of delivery charges and installation charges. As explained below, the tax base under the GSTA and the UTA generally includes delivery and installation charges. But on and after the amendatory acts’ effective date, the charges are excluded from the tax base where the charges are stated separately in the seller’s books or records and on a document, like an invoice, given to the purchaser. Notwithstanding this treatment of delivery charges and installation charges by retailers in general, utilities supplying gas or electricity must include delivery charges such as transmission and distribution charges in the tax base, regardless of how those charges are stated on customers’ bills or in utilities’ books or records.

The amendatory acts also require Treasury to cancel outstanding balances relating to delivery charges and installation charges on notices of intent to assess or on final assessments issued before the effective date and prohibit Treasury from assessing any taxpayer for delivery charges or installation charges for any period before the effective date. The amendatory acts do not require Treasury to issue refunds of tax remitted for periods before the effective date. 

Issues

1. What are delivery charges? What are installation charges?

2. What delivery charges and installation charges are not subject to sales tax or use tax?

3. What delivery charges and installation charges are subject to sales tax or use tax?

4. Are a utility’s charges for transmission and distribution subject to sales tax or use tax?

5. Do the amendments to the GSTA and to the UTA offer relief to taxpayers?

6. What is the tax treatment of a delivery charge for a shipment of taxable items and exempt items?

Analysis and Discussion

1. What are delivery charges? What are installation charges?

The term “delivery charges” is defined in the GSTA, MCL 205.51a(e), and the UTA, MCL 205.92b(e), as follows:

“Delivery charges” means charges by the seller for preparation and delivery to a location designated by the purchaser of tangible personal property or services. Delivery charges include, but are not limited to, transportation, shipping, postage, handling, crating, and packing.

That definition is broad. It includes not just expenses for conveying items to the purchaser (i.e., “transportation, shipping, postage”) but also expenses for preparing the items for conveyance (i.e., “handling, crating, and packing”). Delivery charges generally do not include the cost of shipping insurance, i.e., protecting against risks to tangible personal property during transit to the purchaser (although mandatory shipping insurance may be taxable under MCL 205.51(1)(d)(iii)). Nor do delivery charges include a charge for retrieval.

(Note that the statutory definitions of “delivery charges” also state that “delivery charges do not include the charges for delivery of direct mail if the charges are separately stated on an invoice or similar billing document given to the purchaser.” This RAB does not address that part of the definition of “delivery charges” or anything else about direct mail.)

Example 1 RetailCo sells an assortment of items and charges a fee to ship sold items by contract carrier. The fee is based on the cost of packing materials like cardboard boxes, bubble wrap, and tape; the cost of employee time to pack the items and packing materials; and the cost of the contract carrier’s postage. The entire fee meets the definition of “delivery charges.”

The term “installation charges” is not defined in the GSTA or the UTA, so it is appropriate to consult a dictionary. In the context of “installation charges,” the word “installation” refers to “the act of installing,” i.e., the act of “set[ting] [something] up for use or service.” Merriam-Webster’s Collegiate Dictionary, https://merriam-webster.com/dictionary/installation.

Example 2 OfficeSupplyCo sells office furniture. It also offers, for a fee, to assemble and arrange the furniture within a purchaser’s office space. That fee meets the definition of “installation charges.”

Note, however, that when a retailer sells tangible personal property and installs it such that it is “consumed, affixed to [the real estate], or made a structural part of the real estate,” that retailer is a contractor, and amounts charged for installation are not “installation charges” as that term is used in the GSTA or the UTA. RAB 2019-15, at 16.

2. What delivery charges and installation charges are not subject to sales tax or use tax?

While delivery charges and installation charges generally are included in the tax base, they are excluded under certain circumstances. The GSTA, MCL 205.51(1)(d)(xv), and the UTA, MCL 205.92(1)(f)(xv), exclude the following charges:

Delivery or installation charges if such charges are separately stated on the invoice, bill of sale, or similar document provided to the purchaser, and the seller maintains its books and records to show separately the transactions used to determine the tax levied by this act.

Under these provisions delivery charges and installation charges are excluded from the tax base if two conditions are met: (1) those “charges are separately stated on the invoice, bill of sale, or similar document provided to the purchaser” and (2) “the seller maintains its books and records to show separately the transactions used to determine the tax levied by this act.”

Example 3 RetailCo accepts an online order for an assortment of items to be delivered to the purchaser. RetailCo charges $100 for delivery, which the invoice lists separately from the charge for the items. RetailCo’s books and records reflect that the delivery charge was separate from the item charge. The delivery charge is not subject to the GSTA or the UTA.

Example 4 OfficeSupplyCo sells a bookcase and a desk. For $100, OfficeSupplyCo agrees to assemble and arrange the furniture in the purchaser’s office space. The $100 charge is listed on the receipt separately from the charge for the furniture. OfficeSupplyCo’s books and records reflect that the charge to assemble and arrange the furniture was separate from the charge for the furniture. The charge to assemble and arrange the furniture is an installation charge not taxable under the GSTA or the UTA.

If the charges reflected on the purchaser’s document don’t match the charges reflected in the seller’s books and records, the seller may be liable for the difference.

Example 5 OfficeSupplyCo sells and delivers a desk to a purchaser. The purchaser’s invoice shows a charge of $800 for the desk and a charge of $300 for delivery, with sales tax on the $800 collected from the purchaser and remitted to Treasury. The seller’s books and records show a charge of $1000 for the desk and a charge of $100 for delivery. OfficeSupplyCo owes tax on the $200 difference between the $800 charge on the invoice and the $1000 price in the books and records.

Delivery charges or installation charges not associated with the sale of tangible personal property are not taxable under the GSTA or under the UTA.

3. What delivery charges and installation charges are subject to sales tax or use tax?

Delivery charges and installation charges not separately listed on documents given to the purchaser or in the seller’s books and records are part of the tax base.

Example 6 RetailCo accepts an online order for an assortment of items to be delivered to the purchaser. RetailCo charges $100 for delivery, which is listed on the invoice separately from the $1000 charge for the items. RetailCo’s books and records reflect only a single charge of $1100. Under the GSTA and the UTA, the tax base is $1100.

Example 7 RetailCo accepts an online order for an assortment of items to be delivered to the purchaser. RetailCo charges the purchaser $1100, reflected on an invoice that shows only a single charge, including delivery. RetailCo’s books and records reflect that the $1100 charge comprised a $1000 charge for items and a $100 charge for delivery. Under the GSTA and the UTA, the tax base is $1100.

Example 8 RetailCo accepts an online order for an assortment of items to be delivered to the purchaser at no cost. RetailCo charges the purchaser $1000 for the items. RetailCo’s books and records reflect that it charged the purchaser $100 to deliver the items. Under the GSTA and the UTA, the tax base is $1000.

Importantly, after the effective date, how the GSTA and the UTA apply to delivery charges and installation charges (as explained above in part 2) no longer depends on when the charges are incurred by the purchaser or when ownership of the property transfers from a seller to a purchaser.

4. Are a utility’s charges for transmission and distribution subject to sales tax or use tax?

Yes. As stated above, the GSTA, MCL 205.51(1)(d)(xv), and the UTA, MCL 205.92(1)(f)(xv), exclude delivery charges and installation charges if the charges are shown separately on documents given to the purchaser and in the seller’s books and records. But those statutory provisions don’t apply “to delivery or installation charges involving or relating to the sale of electricity, natural gas, or artificial gas by a utility.”

Under the GSTA, MCL 205.51(1)(o), and the UTA, MCL 205.92(1)(v), the term “utility” includes all suppliers of electricity and natural gas regulated by the Michigan Public Service Commission as well as other suppliers of electricity that are not regulated by the Commission. A utility’s delivery charges and installation charges are subject to the GSTA and the UTA just as they were before the amendatory acts’ passage, regardless of whether the charges are “separately stated” on customer-facing documents or maintained separately in a utility’s books and records.

Example 9 EnergyCo is regulated by the Michigan Public Service Commission and sells electricity to commercial and residential customers. EnergyCo’s bills state charges  for electricity production separately from charges for transmission and distribution. EnergyCo’s books and records also separate these costs. The transmission and distribution charges, which are delivery charges, are taxable under the GSTA and the UTA.

The term “utility” excludes entities, like suppliers of propane gas, that do not supply electricity and that are not regulated by the Michigan Public Service Commission.

Example 10 PropaneCo sells and delivers propane to residential customers. As a supplier of propane gas, PropaneCo is not regulated by the Michigan Public Service Commission and thus is not a “utility” under the GSTA and the UTA. PropaneCo’s bills state charges for propane separately from charges for delivery. PropaneCo’s books and records also separate these costs. The delivery charges are not taxable under the GSTA or the UTA.

5. Do the amendments to the GSTA and to the UTA offer relief to taxpayers?

Yes. On and after the effective date, the GSTA, MCL 205.51(3), and the UTA, MCL 205.92(2), require Treasury to cancel outstanding balances relating to delivery charges and installation charges on notices of intent to assess or on final assessments issued before the amendatory acts’ effective date.

Example 11 Before the effective date, Treasury issued to RetailCo a notice of intent to assess. Treasury must cancel the outstanding balance related to delivery charges or installation charges on which the notice was based.

Example 12 Before the effective date, Treasury issued to RetailCo a final assessment. Treasury must cancel the outstanding balance related to delivery charges or installation charges on which the assessment was based.

Balances are “outstanding” even if they are the subject of an informal conference or litigation.

Example 13 RetailCo requests an informal conference on a notice of intent to assess. The informal conference is pending on the effective date. Treasury must cancel the outstanding balance related to delivery charges or installation charges on which the notice was based.

Example 14 RetailCo sues Treasury to challenge a final assessment. Dispositive motions are pending in court on the effective date. Treasury must cancel the outstanding balance related to delivery charges or installation charges on which the assessment was based.

Example 15 RetailCo sues Treasury to challenge a final assessment. The case is pending in the Court of Appeals on the effective date. Treasury must cancel the outstanding balance related to delivery charges or installation charges on which the assessment was based.

Example 16 RetailCo sues Treasury to challenge a final assessment. The court issues a final judgment in Treasury’s favor; RetailCo’s period to appeal has lapsed. On the effective date, RetailCo has not yet satisfied the judgment. Treasury must cancel the outstanding balance related to delivery charges or installation charges on which the assessment was based.

The same provisions bar Treasury from issuing new assessments based on delivery charges or installation charges for any period before the effective date.

Example 17 During an audit, Treasury determined that RetailCo neither collected nor remitted tax on delivery charges and installation charges in tax year 2022. Treasury may not issue an assessment on the basis of that determination.

The above-described treatment of delivery charges and installation charges under the GSTA and the UTA is not retroactive. The amendatory acts thus do not create a new basis for Treasury to refund sales tax or use tax on delivery charges or installation charges related to sales that took place before the effective date.

Example 18 RetailCo collects and remits sales tax on its retail proceeds, which included delivery charges and installation charges. RetailCo claims a refund of tax on the part of its proceeds comprising delivery charges and installation charges, for the tax year preceding the effective date. Treasury will reject the claim.

Notwithstanding the amendments and subject to MCL 205.73(4), taxpayers may seek refunds relating to sales that took place before the amendatory acts’ effective date if the refunds are supported by the law in effect before the amendatory acts’ enactment.

6. What is the tax treatment of a delivery charge for a shipment of taxable items and exempt items?

The GSTA, MCL 205.51(1)(d)(iv), and the UTA, MCL 205.92(1)(f)(iv), exclude from the tax base “delivery charges allocated to the delivery of exempt property.” If a shipment contains taxable items and exempt items and the delivery charge is not separately stated, the tax base includes the part of the delivery charges attributable to the taxable items. To calculate that part of the delivery charges, the GSTA, MCL 205.51a(e), and the UTA, MCL 205.92b(e), offer two methods: allocating by sales price and allocating by weight.

Allocating by sales price The part of the delivery charge allocated to taxable items is the full delivery charge multiplied by the sales price of the taxable property divided by the sales price of all items in the shipment. That part of the delivery charge thus is included in the tax base.

Example 19 A for-profit daycare provider places an online order with RetailCo, for pencils, crayons, and graham crackers, paying $10 for delivery. The graham crackers, which cost $25, are food and thus exempt. The pencils, which cost $14, and the crayons, which cost $40, are taxable. RetailCo does not separately itemize its delivery charges; therefore, the charges are taxable. Allocating according to sales price, the delivery charge allocated to taxable items is $10 times $54 divided by $79, or $6.84. The tax base is the price of the taxable goods, $54, plus the amount of shipping allocated to the taxable goods, $6.84. At a rate of 6%, the tax levied on the order is $3.65.

Allocating by weight The part of the delivery charge allocated to taxable items is the full delivery charge multiplied by the weight of the taxable property divided by the weight of all items in the shipment. That part of the delivery charge thus is included in the tax base.

Example 20 A for-profit daycare provider places an online order with RetailCo, for pencils, crayons, and graham crackers, paying $10 for delivery. The graham crackers, which cost $25 and weigh 7 pounds, are food and thus exempt. The pencils, which cost $14 and weigh 2 pounds, and the crayons, which cost $40 and weigh 11 pounds, are taxable. RetailCo does not separately itemize its delivery charges; therefore, the charges are taxable. Allocating according to weight, the delivery charge allocated to taxable items is $10 times 13 pounds divided by 20 pounds, or $6.50. The tax base is the price of the taxable goods, $54, plus the amount of shipping allocated to the taxable goods, $6.50. At a rate of 6%, the tax levied on the order is $3.63.