Does a company owe sales tax on a 'shipping and handling' fee it charges for an otherwise free trial-size product, and does it owe use tax on the free product itself?

Plain-English summary

An online beauty-products company runs a promotion offering its product "free," charging customers only for shipping and handling. If the customer likes the free trial, the company sells them a full-price shipment later.

The Department's answer has two separate halves. First, on the customer's side: a shipping-and-handling-only charge doesn't automatically turn a free giveaway into a taxable retail sale. As long as the fee genuinely reflects the company's actual shipping and handling costs, the customer's payment isn't a taxable purchase of the product, and the company isn't required to collect sales tax from the customer on it.

Second, on the company's own side: because the company is really using the product for advertising and promotional purposes (not selling it), the company itself owes sales or use tax on the product given away — the same rule that applies to any promotional giveaway. How much tax depends on whether the company manufactures the beauty products itself (tax computed on the price the company normally sells that item for) or bought them from someone else without paying tax (tax computed on what the company paid, including shipping). Separately, the "printed promotional materials mailed at no charge" exemption doesn't rescue this arrangement — that exemption is for genuinely free samples/materials, and here the customer IS being charged something (shipping and handling), so it doesn't qualify.

There's a critical guardrail: if the "shipping and handling" fee is actually inflated well beyond real market shipping costs — effectively disguising a charge for the product itself — the Department will look past the label and treat the whole thing as an ordinary taxable retail sale to the customer. The company can't relabel a real product charge as "shipping and handling" to dodge tax on the sale.

What this means for you

E-commerce and direct-marketing companies running "free + shipping" promotions

Keep your shipping-and-handling fee tied to your actual costs. That keeps the charge to customers non-taxable, but it does NOT make the giveaway tax-free for you — you owe sales or use tax on the product yourself, as a promotional/advertising expense, computed on either your own retail price (if you manufacture it) or your purchase cost (if you bought it from someone else).

Beauty, subscription, and sample-box businesses

Don't set your "shipping and handling" fee above genuine shipping costs to recoup part of the product's value — doing so risks the Department recharacterizing the whole transaction as a taxable retail sale to the customer, on top of the use tax you already owe on the giveaway.

Accountants and tax professionals

This is a clean template for the "shipping/handling charge vs. disguised sale price" line under 20 NYCRR 526.5(g) and the parallel promotional-giveaway use-tax rule under 20 NYCRR 526.6(c)(4)(i) — both apply independently, so getting the shipping charge right doesn't eliminate the company's own use-tax exposure.

Common questions

Q: Is a shipping-and-handling fee for a "free" trial product taxable to the customer?
A: No, as long as the fee genuinely reflects the company's actual shipping and handling costs.

Q: Does the company still owe tax on the product it gives away for free?
A: Yes — the company owes sales or use tax on the giveaway product as a promotional/advertising expense.

Q: What if the shipping and handling fee is set higher than real shipping costs?
A: Then the transaction is treated as an ordinary taxable retail sale to the customer, not an exempt promotional giveaway.

Q: Can another company rely on this Advisory Opinion for its own free-trial offer?
A: No. It binds the Department only for the petitioner and facts described; another company's fee structure should be checked independently.

Citations and references

Statutes, regulations, and guidance:

• Tax Law §§ 1101(b)(3), (7); 1105(a); 1110; 1115(n)
• 20 NYCRR 526.5(g); 526.6(c)(4)(i)
• TSB-M-97(6)S (expanded promotional materials exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(10)S
Sales Tax
March 9, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S030811B

On August 11, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Goldenthal & Suss CPA’s & Consultants P.C., 2791 Richmond Avenue,
Staten Island, NY 10314.
The issue raised by Petitioner, Goldenthal & Suss CPA’s & Consultants P.C., on behalf
of its client (Company), is:

1. Whether charges to customers and prospective customers designated as a charge for
   shipping and handling are subject to sales tax when there is otherwise no additional
   charge to the customer for the cost of the trial product being delivered.
2. If the shipping and handling charges for the trial product are not subject to sales tax,
   whether use tax is due on such trial product.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Company is organized as an LLC in the state of New York and sells beauty products via
   the Internet. Company is starting a promotion which allows customers, or prospective
   customers, to receive its product free of charge. The only charge Company makes to its
   customers is for shipping and handling. There is no charge for the product itself. If the customer
   is satisfied with the free trial product, Company will send another shipment of the product for a
   charge.
   Applicable law and regulations
   Section 1101(b) of the Tax Law provides, in part:
   When used in this article for the purposes of the taxes imposed by subdivisions
   (a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
   following terms shall mean:
   *

*

*

(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article . . . valued in money, whether received in money or
otherwise . . . without any deduction for expenses or early payment discounts and also
including any charges by the vendor to the purchaser for shipping or delivery . . . .
(Emphasis added)

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*

*

*

(7) Use. The exercise of any right or power over tangible personal property or
over any of the services which are subject to tax under section eleven hundred ten of this
article or pursuant to the authority of article twenty-nine of this chapter, by the purchaser
thereof, and includes, but is not limited to, the receiving, storage or any keeping or
retention for any length of time, withdrawal from storage. . . . Without limiting the
foregoing, use also shall include the distribution of only tangible personal property, such
as promotional materials, or of any such service subject to tax under such section eleven
hundred ten or pursuant to the authority of such article twenty-nine. (Emphasis added)
Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.
Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a use
tax for the use within this state . . . except as otherwise exempted under this article, (A) of
any tangible personal property purchased at retail, (B) of any tangible personal property .
. . manufactured, processed or assembled by the user, (i) if items of the same kind of
tangible personal property are offered for sale by him in the regular course of business
or (ii) if items are used as such . . . if items of the same kind are not offered for sale as
such . . . in the regular course of business, . . . (Emphasis added)
*

*

*

(b) For purposes of clause (A) of subdivision (a) of this section, the tax shall be at
the rate of . . . percent of the consideration given or contracted to be given for such
property, or for the use of such property, including any charges for shipping or delivery .
. . . (Emphasis added)
(c) For purposes of subclause (i) of clause (B) of subdivision (a) of this section,
the tax shall be at the rate of . . . percent of the price at which items of the same kind of
tangible personal property are offered for sale by the user, and the mere storage,
keeping, retention or withdrawal from storage of tangible personal property by the person
who manufactured, processed or assembled such property shall not be deemed a taxable
use by him; provided, however, that if the user uses such an item itself on its own
premises (not including making a gift of such tangible personal property), solely in the
conduct of the user's own business operations, and the item retains its characteristic as
tangible personal property when so used, the tax shall be at the rate, and on the
consideration, described in subdivision (d) of this section. (Emphasis added)

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(d) For purposes of subclause (ii) of clause (B) of subdivision (a) of this section,
the tax shall be at the rate of . . . percent of the consideration given or contracted to be
given for the tangible personal property manufactured, processed or assembled into the
tangible personal property the use of which is subject to tax, including any charges for
shipping or delivery as described in paragraph three of subdivision (b) of section eleven
hundred one.
Section 1115(n) of the Tax Law provides, in part:
(1) Except as otherwise provided in this subdivision, promotional materials
mailed, shipped or otherwise distributed from a point within the state, by or on behalf of
vendors or other persons to their customers or prospective customers located outside this
state for use outside this state shall be exempt from the tax on retail sales imposed under
subdivision (a) of section eleven hundred five and the compensating use tax imposed
under section eleven hundred ten of this article.
*

*

*

(4) Notwithstanding any contrary provisions of paragraph one of this subdivision,
promotional materials which are printed materials and promotional materials upon which
services described in paragraph two of subdivision (c) of section eleven hundred five
have been directly performed shall be exempt from tax under this article where the
purchaser of such promotional materials mails or ships such promotional materials, or
causes such promotional materials to be mailed or shipped, to its customers or
prospective customers, without charge to such customers or prospective customers, by
means of a common carrier, United States postal service or like delivery service.
*

*

*

(8) Nothing in this subdivision shall be construed to exempt tangible personal
property (i) purchased by a person (other than exempt promotional materials described in
paragraph four of this subdivision) or (ii) manufactured, processed or assembled by the
manufacturer, processor or assembler, who furnishes such property to the vendor of
promotional materials exempt under paragraph one or four of this subdivision to be
included as free gifts with such exempt promotional materials to be mailed or shipped to
such purchaser’s or such manufacturer’s, processor’s or assembler’s customers or
prospective customers or who otherwise uses such property in this state, for example, by
giving or donating the property as free gifts to another person, unless such tangible
personal property is mailed, shipped or otherwise distributed from a point within this
state to such customers or prospective customers located outside this state for use outside
this state.
Section 526.5(g) of the Sales and Use Tax Regulations provides, in part:

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Shipping or delivery. (1) Shipping or delivery charges by a vendor to its customer
for the cost of transporting tangible personal property to the customer are part of the
vendor’s receipt subject to tax where the sale of the property is subject to tax or where
taxable services were performed on the property. This is so regardless of whether the
vendor separately states such charges in a written contract or on an invoice and regardless
of whether the vendor ships or delivers the property itself or hires a third party to ship or
deliver the property. Similarly, charges by a vendor to its customer for picking up the
customer’s property upon which the vendor is to perform taxable services are part of the
vendor’s receipt from the sale of the service subject to tax.
(2) A charge by a vendor to its customer for the cost of transportation of the
property from a supplier, manufacturer, warehouse or catalog or other distribution point
to the vendor’s place of business is also part of the vendor’s receipt from the sale of the
property to the customer subject to tax, whether the charge is designated as
transportation, shipping, handling or in some other manner.
Section 526.6(c) of the Sales and Use Tax Regulations provides, in part:
(1) Where a person, in the course of his business operations, purchases tangible
personal property or services which he intends to sell, either in the form in which
purchased, or as a component part of other property or services, the property or services
which he has purchased will be considered as purchased for resale, and therefore not
subject to tax until he has transferred the property to his customer.
*

*

*

(4)(i) Tangible personal property which is purchased and given away without
charge, for promotion or advertising purposes is not purchased for resale. It is a retail sale
to the purchaser thereof, and is not a sale to the recipient of the property.
Opinion
Company sells beauty products via the Internet. Company is starting a promotion
whereby its customers and prospective customers will receive its product “free of charge” except
for a charge to Company’s customers and prospective customers for shipping and handling.
A shipping and handling charge does not, by itself, convert a nontaxable promotional
giveaway into a taxable sale of tangible personal property for consideration. Company’s
provision of trial samples of its product to customers and prospective customers in New York
State upon receipt of a payment by the customer of a fee designated as a charge for shipping and
handling is not subject to sales tax if such fee reflects Company’s actual shipping and handling
costs.

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If Company’s charge to send the product is reflective of its actual shipping and handling
costs, Company will not be considered to be making a retail sale of its product to the customer.
Company is considered to be using the product for advertising and promotional purposes. See
section 526.6(c)(4)(i) of the Sales and Use Tax Regulations. Company is liable for sales or use
tax on product which is withdrawn from inventory and not sold but distributed to customers or
prospective customers in New York. The product in such case is used and consumed by
Company in its advertising and sales promotion program. See sections 1101(b)(7) and 1110 of
the Tax Law; and section 526.6(c)(4)(i) of the Sales and Use Tax Regulations.
The computation of the amount of sales and use tax owed by Company will depend on
whether Company is a manufacturer of the beauty products or a reseller of such products. If
Company purchased the beauty products from the manufacturer or other vendor and did not pay
tax on the products at the time of sale, the tax will be computed on the purchase price, including
any charges for shipping or delivery, which Company paid to obtain the beauty products. See
section 1110(b) of the Tax Law. If Company is the manufacturer of the beauty products, and the
same kind of property as the promotional product is offered for sale by Company in the regular
course of business, the use tax is to be computed on the price at which items of the same kind are
offered for sale by Company. See section 1110(c) of the Tax Law.
Printed promotional materials and promotional materials upon which services described
in section 1105(c)(2) of the Tax Law have been performed are exempt from sales and use tax
where the purchaser of such promotional materials mails or ships them to customers or
prospective customers without charge, by means of common carrier, United States Postal Service
or like delivery service. The exemption does not apply, however, to free manufacturers’ samples
mailed or shipped to customers or prospective customers in New York State. See section
1115(n)(4) and (8) of the Tax Law; and Technical Services Bureau Memorandum entitled
Expanded Sales and Compensating Use Tax Exemption for Promotional Materials, August 20,
1997, TSB-M-97(6)S. It does not appear in the present case that the trial samples shipped by
Company to customers or prospective customers in New York would qualify for exemption
under section 1115(n) since the samples and any related promotional materials are not provided
to customers and prospective customers without charge. Company charges the customers or
prospective customers for shipping and handling. Promotional materials, printed or otherwise,
mailed or shipped by Company to customers or prospective customers outside New York might
qualify for exemption from tax. See section 1115(n)(1) of the Tax Law.
It should be noted that if the fee designated by Company as a charge for shipping and
handling exceeds ordinary and reasonable shipping and handling costs based on prevailing
industry rates and actually reflects Company’s cost of the product plus the cost of shipping and
handling, the transaction will be considered to be a retail sale to Company’s customer. See
Jeffrey J. Coren, CPA, P.C., Adv Op Comm T&F, January 28, 1999, TSB-A-99(8)S. For
example, shipping and handling charges for the “free” product that are significantly greater than
the shipping and handling charges for the same item when the item is purchased by the customer
are an indicator that the transaction is a retail sale. Such sale will be subject to sales or use tax

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when delivered to a customer in New York State. The designation of the charge as one for
shipping and handling in such case would not affect such determination. The definition of the
taxable receipt for the purchase of property and services includes charges to the customer for
shipping and transportation whether such charges are separately stated or not. See section
1101(b)(3) of the Tax Law. Similarly, handling charges are also subject to tax as part of the
receipt for the purchase of taxable goods and services. See Brooklyn Metropolitan Real Estate
News, Adv Op St Tx Comm, Nov 14, 1985, TSB-A-85(57)S; section 526.5(g) of the Sales and
Use Tax Regulations.

DATED: March 9, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.