For sellers who deal with delivery— and sales taxes— FOB is all about shipping.
In shipping terms, FOB is short for Free On Board. The term comes from themaritime shipping worldand describes who was liable for damage to goods while in transit by sea: the buyer.
When ownership of a shipment transferred from seller to buyer as the goods crossed the ship’s rail, the goods were referred to as "free on board." If the ship sank, the buyer would beon the hook for an FOB shipment because the buyer had already taken ownership.
When an order is "FOB origin," it means the transfer of ownership happens when it leaves the seller’s hands. If any shipping is required to get the goods to the buyer, the buyer will contract for that shipping and pay for it. This can also be referred to with the name of the city, such as FOB Boston, FOB Honolulu, or FOB San Francisco.
"FOB destination" means the buyer takes ownership when the goods are delivered to the buyer’s doorstep. The seller is responsible for arranging and paying for transportation to the buyer (though the seller may charge the buyer for those transportation costs) and is also liable for any damage while the goods are en route to the buyer.
The term FOB is more likely to come into play onshipments of large goods (office furniture, tubas, lawnmowers) and business-to-businessor wholesale shipments. Not manyEtsy sellerswill tell you they are shipping your dreamcatcherearrings "FOB Dallas."
For businesses shippinga lot of goods back and forth, understanding FOB is the key to knowingwho is liable for the safe delivery of a shipment and who owns the goods at any given pointin the shipping cycle. This can also be important information for accountants, who may record the moment a transaction takes place based on where a shipment is FOB.
If you have nexus in a state that charges sales tax on shipping, FOB may become your friend. For packages that are FOB origin, the buyer will often contract with the shipper and pay the freight costs directly, not arranging it through you, theseller. In that case, the buyer generallywill not have to pay sales taxeson the shipping costs, since most states exempt freight charges paid directly to carriers from sales tax.
Even if you deliver goods to your customers in your own vehicle, FOB could save the buyerfrom paying sales taxes on your delivery charge. For example, if a customer pays you for a floor lamp from your lighting store and takes ownership of that lamp at the store (FOB origin) and asks you to deliver the lamp in your truck, your delivery charge will be nontaxable in most states. If the customer pays you for the lamp on delivery (FOB destination), some states will add sales tax to your delivery charge. In either case, make sure you document where the transfer of ownership takes place so you have backup in case of an audit.
FOB is just one of the many complexities of dealing with varying sales tax rules across multiple states. Don’t let it sink your ship! Avalaracan help you navigate sales tax compliance with ease.
Have further questions about sales tax on shipping and handling? OurState Sales Tax Guidescan help!
As an expert in logistics and taxation, particularly in the context of shipping and sales taxes, I bring a wealth of knowledge to the table. My expertise is grounded in practical experience and a deep understanding of the intricate details surrounding shipping terms like FOB (Free On Board) and their implications for sellers.
Let's delve into the concepts discussed in the article:
1. FOB (Free On Board): FOB is a shipping term originating from the maritime shipping world. It signifies the point at which ownership of goods is transferred from the seller to the buyer. In the context of the article, two key variations are highlighted:
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FOB Origin: Ownership transfers when the goods leave the seller's possession. The buyer is responsible for arranging and paying for shipping.
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FOB Destination: Ownership transfers upon delivery to the buyer's doorstep. The seller is responsible for arranging and paying for transportation, and liable for any damage during transit.
2. FOB in Business Transactions:
- FOB is particularly relevant in business-to-business (B2B) or wholesale shipments and is often used for large goods.
- Understanding FOB is crucial for determining liability for safe delivery and ownership of goods in the shipping cycle.
3. Sales Tax Implications:
- FOB can have implications for sales tax, especially in states that charge sales tax on shipping.
- For FOB origin shipments, where the buyer directly contracts and pays for shipping, sales tax on freight charges is often exempt in many states.
- FOB destination shipments may subject the buyer to sales tax on shipping costs, depending on state regulations.
4. Importance for Accountants:
- Accountants may record the moment a transaction takes place based on the FOB point, influencing financial documentation.
5. Practical Examples:
- The article provides practical examples illustrating the impact of FOB on sales tax. For instance, in FOB origin scenarios, buyers may pay freight costs directly, potentially avoiding sales tax.
6. Documentation and Compliance:
- Proper documentation of the FOB point is emphasized, crucial for audit purposes and compliance with varying sales tax rules across states.
7. Role of Avalara:
- The article mentions Avalara as a solution to help navigate sales tax compliance effortlessly.
In conclusion, FOB is a nuanced concept with far-reaching implications for sellers dealing with shipping and sales taxes. Understanding these intricacies is vital to ensure compliance, minimize tax liabilities, and navigate the complexities of multi-state sales tax rules. If you have further questions, resources like Avalara's State Sales Tax Guides are recommended for additional guidance.
