Understanding sales tax and shipping fees

• SUMMARY: Different types of sales taxes and shipping fees affect the final price of a purchase.

Benjamin Franklin famously noted, “Our Constitution is in actual operation; everything appears to promise that it will last; but in this world, nothing is certain but death and taxes.” When someone makes a purchase, often times there are extra charges added to the customer’s bill. These costs may include tax, shipping charges, or fees. These extra amounts, however, have a special purpose and they are each computed differently. For example, a sales tax is based on a percentage of the total amount of the sale, and that percentage is regulated by local and state governments. On the other hand, shipping is charged to cover the delivery of merchandise from the retailer to the customer’s location. These fees are based on the policies of the company selling the goods as well as how quickly the customer would like their purchase delivered. Lastly, fees can be special charges; for example, insurance might be added to a purchase to cover the cost of the merchandise in the event it is lost or damaged during delivery. Albert Einstein commented that preparing a tax return “is too difficult for a mathematician. It takes a philosopher.” The calculations to determine sales tax and shipping fees utilize percentages, multiplication, and addition, but Einstein may have been referring to the ever-changing instructions.

Both mathematicians and philosophers have long been involved in issues related to taxation. The Jiuzhang suanshu (Nine Chapters on the Mathematical Art) contains related problems. In the tenth century, astronomer and mathematician Abu’l-Wafa wrote a text on mathematics for scribes and business people, with part four of the book containing seven chapters devoted to various kinds of taxes and related calculations. In the seventeenth century, lawyer and amateur mathematician Étienne Pascal worked as a tax assessor and was appointed as the chief tax officer. To help his father in his tax work, mathematician and philosopher Blaise Pascal invented the Pascaline, which is reported to be the first digital calculator. In the twenty-first century, financial planners, mathematicians, and actuaries create mathematical models and investigate a variety of mathematical concepts related to taxes and fees, including the impact of flat rate, progressive, symmetric, or asymmetric taxation; and game theory applied to the interaction between taxpayers and tax collectors. They also investigate equilibrium states and how increasing or decreasing sales taxes or shipping and handling fees or using a nonlinear structure impacts consumer decisions about purchases and business sales.

Sales Tax

Many states, counties, and municipalities levy a sales tax as a way to increase revenues for their government or to balance their budget; however, not every state or local government charges a sales tax. The tax rate varies depending on the laws of the governmental unit. In other words, consumers encounter different sales tax rates throughout the United States. The charges vary from 0 percent in states like Alaska,Delaware, Montana, New Hampshire, and Oregon, to a high of 7.25 percent in California. This means that a person in Alaska who pays $100 for a pair of shoes would not be required to pay any tax on the sale. However, a person buying that same pair of shoes in California would be required to pay this tax. In other words, that $100.00 purchase would have an 7.25 percent tax added to the cost, meaning the new purchase price would be the original cost ($100.00) plus the sales tax ($7.25) for a total of $107.25. However, in some localities in Alaska, local sales taxes are imposed.

Many localities exempt certain classifications of goods from their sales tax. Some common exceptions include groceries and prescriptions. On the other hand, special items such as gasoline, cigarettes, and alcohol have a significantly higher sales tax, as they have the potential to add sizeable revenue to a state’s budget. A federal law proposed in 1998 and made permanent in 2016 called the Internet Tax Freedom Act (ITFA) specifically addresses sales over the Internet. The law provides that no governmental unit is allowed to add any special or additional tax on Internet purchases. This means that a sales tax may be charged on Internet purchases at the same rate as items purchased in person, but no extra tax charge can be added.

Notably, sales tax rates for states and localities change often. The Tax Foundation and state websites can help consumers and business owners remain informed.

Shipping and Handling Fees

Shipping and handling fees vary dramatically by seller as well as by the type of shipping the buyer requests. Common factors used to compute delivery costs include (1) how many items are being purchased, (2) how much the order weighs, and (3) how quickly the customer would like to receive their merchandise. However, common shipping types include free shipping, overnight delivery, two-day or expedited delivery, and standard shipping, which may vary from three to seven days. In addition, the cost may change based on the number of items purchased or the weight of the merchandise. The following three examples illustrate different types of shipping options:

• Flat fee: The seller charges a flat shipping fee for all purchases regardless of price, weight, or number of items.
• Progressive: The seller charges a progressively larger shipping charge based on the cost of the purchase. Shipping for a $50 purchase might cost $5, while shipping for a $100 purchase might cost $10.
• Flat fee and item charge: The seller charges a flat shipping rate plus an item charge (shipping + charge × number of items). Assume that the base shipping is $3.99, and there is a charge of $.99 for each item. A one-item purchase would have a charge of $3.99+$0.99=$4.98. However, suppose the purchaser buys three items. In that case, the charge would be $3.99+3($0.99)=$6.96.

Shipping and handling fees are often grouped together as one charge; however, some vendors are known to charge each of these as separate and distinct charges. Vendors often add an additional charge to deliver large items or other special purchases. For example, an additional charge may be required for a package that requires special handling based on size or weight, such as a piece of furniture or an item that must remain frozen. Higher-cost items such as jewelry may have an insurance charge added to the customer’s total.

Bibliography

Anderson, Patrick. Business Economics and Finance with MATLAB, GIS and Simulation Models. CRC Press, 2000.

Consortium for Mathematics and Its Applications. Mathematical Models with Applications. W. H. Freeman & Company, 2002.

Fields, Robert J. Understanding and Managing Sales and Use Tax. 7th ed., CCH, 2012.

"How to Calculate Handling Fees on Your Orders." Cin7 Americas, 29 Feb. 2024, www.cin7.com/blog/how-to-calculate-handling-fees-on-your-orders. Accessed 19 Dec. 2024.

"The Small Business Guide to Shipping Charges and Sales Tax." Avalara, www.avalara.com/us/en/learn/whitepapers/small-business-guide-shipping-charges-sales-tax.html. Accessed 19 Dec. 2024.

Walczak, Jared. "State and Local Sales Tax Rates, 2024." Tax Foundation, 6 Feb. 2024, taxfoundation.org/data/all/state/2024-sales-taxes. Accessed 19 Dec. 2024.