ORDERS:
ORDER AND DECISION
STATEMENT OF THE CASE
This sales tax matter is before the Administrative Law Judge Division pursuant to S.C. Code
Ann. §§ 1-23-310 et seq. (1986 and Supp. 1997) and S.C. Code Ann. § 12-60-460 (Supp. 1997).
Respondent South Carolina Department of Revenue ("DOR") seeks additional sales taxes and
interest on Petitioner's gross proceeds of sales for the period of May, 1993 through February, 1996.
Petitioner ("Taxpayer") requested a contested case hearing on this matter as a small claims case
pursuant to S.C. Code Ann. § 12-60-520 (Supp. 1997). Therefore, this Order shall have no
precedential value except to Taxpayer for the tax period in controversy and it may not be reviewed
by any court. S.C. Code Ann. § 12-60-520 (Supp. 1997).
Taxpayer exhausted its pre-hearing remedies pursuant to S.C. Code Ann. § 12-60-450 (Supp.
1997). After notice to all parties, a hearing was conducted on April 9, 1998. Based on the evidence
presented, the assessment of additional sales tax and interest on Taxpayer's gross proceeds of sales
for the period of May, 1993 through February, 1996 is proper. Taxpayer is liable for $3,352.92 in
additional taxes, plus interest, for the tax period in question. Any issues raised in the proceedings
or hearing of this case but not addressed in this Order are deemed denied pursuant to ALJD Rule
29(C).
FINDINGS OF FACT
Taxpayer is a retailer of business forms and other business products. Taxpayer contracts with
its customer to deliver a product to the customer's place of business. Taxpayer does not normally
store its product on-site, but arranges for transportation of the product directly from a selected
manufacturer to its customer. Ninety-five (95%) percent of Taxpayer's customer orders are shipped
directly from the factory to Taxpayer's customer. Upon receiving an order from a customer,
Taxpayer contacts a manufacturer of the particular product and obtains a quotation for the wholesale
price. The written quotation from the manufacturer normally includes the freight terms "f.o.b. point
of origin," "f.o.b. shipping point" or similar language.
Taxpayer then quotes the product's retail price to its customer. Taxpayer notifies its
customer that the quoted price does not include freight, and that Taxpayer will "pre-pay" the freight
charge, then add it as a separate item on the invoice. In its shipping instructions to the manufacturer,
Taxpayer requests the manufacturer to pre-pay and add freight charges in the manufacturer's invoice
to Taxpayer. Taxpayer also requests that the product be shipped directly to its customer with
Taxpayer's name and address on the return label.
Once the product is shipped to Taxpayer's customer, the manufacturer sends an invoice to
Taxpayer which includes a separately listed freight charge. Taxpayer then sends an invoice to its
customer which includes a separately listed freight charge. Taxpayer then pays the manufacturer the
shipping charge and is later paid by its customer for the shipping charge.
The other five (5%) percent of Taxpayer's customer orders are warehoused at Taxpayer's
place of business, and Taxpayer bills the customer for the shipment of the product from the
manufacturer to Taxpayer. Taxpayer delivers the product from its place of business to the
customer's place of business free of charge.
In completing its monthly sales tax returns, Taxpayer included freight expenses in its
deductions from gross proceeds to arrive at net taxable sales. DOR conducted an audit of Taxpayer
for the period of May, 1993 through February, 1996. When questioned by DOR's auditor, Taxpayer
indicated that the freight expenses were for product shipments directly from the manufacturer to
Taxpayer's customer.
On June 6, 1996, DOR issued a Notice of Adjustment disallowing the deductions for freight
charges and assessing additional sales tax of $3,352.92 and $457.76 in accumulated interest. After
Taxpayer availed itself of DOR's internal appeals process, DOR issued its Final Agency
Determination, dated December 1, 1997. The Final Agency Determination affirmed the June 6, 1996
adjustment and assessed additional accumulated interest through January 31, 1998, for a total sales
tax liability of $4,394.84.
CONCLUSIONS OF LAW
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every person
engaged in the business of selling tangible personal property at retail. S.C. Code Ann. § 12-36-910
(Supp. 1997). "Gross proceeds of sales" means the value proceeding or accruing from the sale,
lease, or rental of tangible personal property. S.C. Code Ann. § 12-36-90 (Supp. 1997).
The term includes ... the proceeds from the sale of tangible personal
property without any deduction for:
(I) the cost of goods sold;
(ii) the cost of materials, labor, or service;
(iii) interest paid;
(iv) losses;
(v) transportation costs;
(vi) manufacturers or importers excise taxes imposed by the United States;
or
(vii) any other expenses.
S.C. Code Ann. § 12-36-90(1)(b) (Supp. 1997). This provision clearly expresses the legislature's
intent to disallow deductions for the retailer's expenses from the gross proceeds of sales in
computing sales tax liability. In other words, gross proceeds of sales cannot be reduced by the cost
of doing business.
Whether freight charges may be deducted from gross proceeds of sales, in computing sales
tax liability, does not depend upon the separate billing of the charge, but depends on whether the
shipping services are rendered to the seller (retailer) or the buyer (retail customer). 27 S.C. Code
Ann. Regs. 117-156 (1992). Further,
[i]f the seller contracts to deliver tangible personal property
to some designated place ... the transportation charges are rendered to
the seller ... and the selling price of the tangible personal property so
transported must include the amount of the transportation charges. In
this event such charges are not deductible by the seller in computing
his tax liability under the Law. On the other hand, if the seller
contracts to sell tangible personal property f.o.b. origin, the title to the
property passing at such point to the buyer and the buyer pays the
transportation charges, then the transportation services are rendered
to the buyer and are not a part of the selling price of the vendor.
Therefore, such transportation charges should not be included by the
vendor in computing his tax liability under the Law. These principles
will apply irrespective of whether such charges are separately billed
by the seller from the tangible personal property sold.
Id.
Regulations 117-174.214 and 117-174.215 further specify the circumstances under which
the shipping service is rendered either to the retailer or the retail customer. Regulation 117-174.214,
entitled "Transportation Charges," addresses the typical retail sale where the goods are located at the
retailer's place of business prior to shipment to the customer, and the retailer bills the customer for
shipment from the retailer's place of business to the customer's place of business. Regulation 117-174.215, entitled "Transportation Costs, Sellers," clearly addresses retail sales involving direct
factory-to-customer shipments.
Under Regulation 117-174.214, whether the shipping service is considered rendered to the
retail customer is determined by the freight terms between the retailer and the customer. If the sale
is made "f.o.b. point of origin," title to the goods passes to the customer when the goods are
delivered by the retailer to the shipping service, and the customer must bear the risk of loss during
shipment. See S.C. Code Ann. § 36-2-319(1) (1976) and South Carolina Reporter's Comments; see
also 67 Am.Jur.2d Sales §§ 411 and 566 (1985).
Under these circumstances, the shipping service is considered rendered to the customer, and
the retailer is allowed to deduct from its gross proceeds of sale any freight charges paid on behalf
of, and reimbursed by, the customer. See 27 S.C. Code Ann. Regs. 117-174.214(c) (1992).
Otherwise, the shipping service is considered rendered to the retailer, and the retailer may not deduct
the freight charges from gross proceeds of sales. See 27 S.C. Code Ann. Regs. 117-174.214(a) and
(b) (1992).
Under Regulation 117-174.215, when the nature of the retailer's business requires direct
factory-to-customer shipment of the goods, the shipping services are rendered to the retailer, the
freight charges are considered a cost of doing business, and the retailer is prohibited from deducting
the freight charges from its gross proceeds of sale:
In no event may a seller deduct costs of bringing
property to his place of business or costs of delivering
property from [the] factory to his customer when such
factory-to-customer transportation is paid by the seller
either to a transportation company, the manufacturer,
or by way of credit to his customer for transportation
costs paid by the customer and deducted from [the]
seller's invoice.
27 S.C. Code Ann. Regs. 117-174.215 (1992)(emphasis added); see also 27 S.C. Code Ann. Regs.
117-156 (1992)(If the retailer contracts to deliver tangible personal property to some designated
place, the transportation charges are rendered to the retailer).
Therefore, when the retailer pays the manufacturer for any shipping from the factory, whether
to the retailer's place of business or directly to the retailer's customer, it is a service rendered to the
retailer and part of the retailer's cost of doing business. The freight charge, whether factored into
the retail price of the goods sold or billed separately on the retailer's invoice to the customer, cannot
be deducted from gross proceeds of sales. See S.C. Code Ann. § 12-36-90(1)(b) (Supp.
1997)(retailer's expenses may not be deducted from gross proceeds of sales); 27 S.C. Code Ann.
Regs. 117-156 (1992)(whether freight charges may be deducted from gross proceeds of sales, in
computing sales tax liability, does not depend upon the separate billing of the charge, but depends
on whether the shipping services are rendered to the seller or the buyer).
Taxpayer argues that 27 S.C. Code Ann. Regs. 117-174.214(c) (1992) provides an exception
to Regulation 117-174.215, and that this exception applies to its business. Taxpayer asserts that its
freight charges were stated separately on customer invoices and that it notified customers in advance
that the product price would not include freight charges. Taxpayer also asserts that Regulation 117-174.214(c) applies to its business because the manufacturers' written price quotations included the
freight terms "f.o.b. point of origin" or similar language.
The retailer may deduct from its gross proceeds any freight charges paid on behalf of, and
later reimbursed by, its customer only in those cases where the shipping service is considered
rendered to the retail customer. 27 S.C. Code Ann. Regs. 117-156 (1992). When the retailer
contracts with the customer to deliver the goods to the customer's place of business, the shipping
services are rendered to the retailer, regardless of whether such charges are billed by the retailer as
a separately listed item. Id. In this case, Taxpayer's (retailer's) contract with its customer is for the
delivery of the goods to the customer. The freight terms in the manufacturer's quotations are part
of an agreement between the manufacturer and Taxpayer only. Upon the manufacturer's delivery
of the goods to the shipping service, title (and risk of loss) passes to Taxpayer. Taxpayer bears the
risk of delivery of the goods either to the Taxpayer's business or to the customer's business. There
is no evidence of an agreement between Taxpayer and its customers for the customer to bear the risk
of loss during shipment.
Taxpayer does not make its sales f.o.b. origin. Its sale is complete when the goods are
received by the customer at the customer's place of business. If the goods are lost or damaged before
the customer receives them, Taxpayer is responsible. Thus, the shipment of the goods directly to the
customer is for the benefit and at the expense of Taxpayer because title to the goods does not pass
from Taxpayer to the customer until received at the point of destination.
Because the shipping services are rendered to Taxpayer, Taxpayer is prohibited from
deducting the freight charges from its gross proceeds of sale under Regulations 117-156 and 117-174.215. Notably, DOR has consistently applied the law in this manner to businesses like
Taxpayer's. See South Carolina Department of Revenue Manual of Decisions, Volume I, at page
S-145 (March 26, 1982).
In the 5% of customer orders delivered from Taxpayer's place of business to the customer's
place of business, Taxpayer bills the customer for freight from the factory to its place of business and
then deducts these freight charges from gross proceeds on its monthly sales tax return. These freight
charges are costs of doing business. Therefore, Regulation 117-174.215 prohibits their deduction
from gross proceeds of sales in computing sales tax liability.
Based on the foregoing, all deductions for freight expenses on Taxpayer's monthly returns
for the tax period in question were properly disallowed by DOR.
WAIVER OF INTEREST
Taxpayer requests that the accumulated interest be waived. Interest is due on the unpaid
portion of taxes from the time the tax was due until paid in its entirety. S.C. Code Ann. § 12-54-25
(Supp. 1997). Sales tax payments to DOR are due on or before the twentieth day of the month
following the month in which the tax accrues. S.C. Code Ann. § 12-36-2570(A) (Supp. 1997).
While penalties assessed against a taxpayer may be waived pursuant to S.C. Code Ann. § 12-54-160
(Supp. 1997), this section specifically prohibits the waiver, dismissal or reduction of interest.
ORDER
Based upon the foregoing, it is hereby
ORDERED that South Carolina Department of Revenue shall assess against Taxpayer taxes
in the amount of $3,352.92, plus accumulated interest.
AND IT IS SO ORDERED.
__________________________________
ALISON RENEE LEE
Administrative Law Judge
July 9, 1998
Columbia, South Carolina |