Nearly every major retailer has embraced consumer demands for quick and easy delivery. In fact, experts predict that online food delivery alone will become a $32 billion industry by 2024. The rise of delivery services has made it easier for consumers to get purchases more quickly and for retailers to offer these services more widely.
From the convenience of same- or one-day shipping provided by large online marketplaces to the luxury of having groceries or dinner delivered to your front door, the breadth and depth of delivery has created new revenue channels for businesses. However, at the same time many governments have watched the meteoric rise of these delivery services closely and taken steps to impose additional fees and capture funds from new revenue channels.
Where Retail Delivery Fees have been Introduced and Imposed
In 2022, Colorado imposed a retail delivery fee on taxable tangible goods delivered by motor vehicles to consumers in the state. The fee is far-reaching, with brick-and-mortar retailers, florists, grocery stores, restaurants, online sellers and marketplaces among the businesses subject to it. Colorado is set to increase the fee from 27 cents to 28 cents this July, but legislators also are exploring ways to simplify the requirement. Senate Bill 23-143 would allow businesses to pay the retail delivery fee themselves instead of charging customers. The legislation would also exempt small businesses that have $500,000 or less of retail sales in the state, as well as new businesses.
The Centennial State jumpstarted what appears to be a trend in government as authorities look to glean additional revenue from the ever-growing delivery industry. Earlier this year, Minnesota introduced a similar bill to Colorado’s that applies to any retail sale of tangible personal property by a retailer (including a marketplace provider or facilitator) for delivery by a motor vehicle to the purchaser at a location in Minnesota, “in which the sale contains at least one item of tangible personal property that is subject to taxation.” To make matters more complex, Minnesota’s proposed fee would also apply to retail sales of clothing, which is generally exempt from Minnesota sales tax. If adopted, the retail delivery fee would go into effect Jan. 1, 2024, with a price tag of 40 cents per sale.
A similar bill in New York City would impose a 25-cent surcharge on every online delivery sale within city limits. Senate Bill S5895 takes aim at the increase of deliveries into the heavily populated urban center and the impact this influx is having on the city.
In New York State, Assembly Bill 3009 would include a fee on delivery transactions that terminate within the state. The 25-cent statewide fee would apply to transactions that result in the delivery of personal tangible property from a retail sale, regardless of if the purchase is made online or not.
Why Retail Delivery Fees are Appealing to States
There are two main reasons why imposing a fee on motor vehicle deliveries is appealing to policy makers — revenue and the environment. Colorado estimated that its retail delivery fee will bring the state up to $18.8 million in revenue in its first two years. Minnesota expects that its proposed fee would generate $46.4 million in its first year.
When it comes to the environment, New York City is hopeful that a retail delivery fee could offset the impact of emissions from heavy delivery traffic. The city’s department of transportation would like to have more freight come in via rail instead of on roads. The move would reduce the number of diesel vehicles entering the city, which are believed to be responsible for half of tailpipe emissions.
Colorado’s statute cites research from the World Economic Forum that estimates there will be 30% more delivery vehicles on the roads by 2030. Given the additional emissions and impact on infrastructure, the state insists that the retail delivery fee is necessary.
What Retailers Need to Know About Proposed Retail Delivery Fees
Like most taxes and fees implemented by government, how states and localities define their requirements will vary. This is evident just by comparing the two proposals in New York State and New York City. The statewide fee would apply to transactions that result in the delivery of personal tangible property — it doesn’t matter if the sale originated online — while the New York City proposal focuses solely on online purchases.
Retailers will also need to consider how they will charge their customers and account for the additional costs that customers will incur. Likewise, retailers will need systems in place to ensure they can capture any retail delivery fees when applicable, based on the rules and rates set by jurisdictions.
While many retail delivery fees remain in proposal form, it’s likely that we will see more states and localities follow Colorado’s lead and explore their own fees. For retailers currently offering delivery services or those looking to expand their offerings, understanding existing requirements in Colorado and those that may materialize in the future will be essential for not only staying compliant but also avoiding disruptions to customer experience.
Scott Peterson is VP of U.S. Tax Policy at Avalara. He was the first executive director of the Streamlined Sales Tax Governing Board. For seven years, Peterson acted as the COO of an organization devoted to making sales tax simpler and more uniform for the benefit of business. He also spent 10 years as director of the South Dakota Sales Tax Division and 12 years providing research and legal writing for the South Dakota Legislature. He’s now Avalara’s go-to resource for all things related to U.S. tax policy.