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What’s wrong with retail delivery fees

Michael Bernard assesses the side effects of retail delivery fees.

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Hungry for ways to offset declining gas tax revenues, state tax authorities are discovering an appetite for fees that they can levy on last-mile delivery services. A new Tax Foundation article explains why these fees are not a solution for states’ transportation budget woes and examines the negative effects on retail businesses and consumers. (Spoiler alert: the implications are worse than you might think.)

To be sure, transportation funding gaps are a significant issue for most states, and the popularity of electric vehicles may be cutting into gas tax yields. However, delivery fees are an ineffective and inefficient solution, according to the Tax Foundation, which identifies four shortcomings:

  1. Consumers are ultimately hit with higher prices: At least some part of retail delivery fees will be passed on to the customer. Additionally, local delivery services are heavily used by elderly, mobility-challenged and less affluent individuals, and these consumer segments would bear the brunt of price increases.
  2. Local retailers are disadvantaged: While income limits protect some smaller businesses, larger local companies would likely be affected. Passing on the cost to customers results in a loss of price competitiveness compared with non-local operators that don’t use last-mile delivery services.
  3. Retailers using gas or diesel-powered vehicles face double taxation: This is the case because the delivery fee is imposed in addition to existing fuel excise taxes.
  4. Fees add to compliance burdens – and compliance costs. Changes to invoicing systems may be necessary to accommodate delivery fees. And while these fees are not technically a form of indirect taxation, they create familiar headaches for tax departments, which must understand and track sales tax exemptions. Minnesota, for example, exempts drugs and baby products from retail delivery fees; Colorado does not.

The article also notes that state and local lawmakers have other, more effective tools at their disposal to ease transportation budget difficulties. An increase in gas tax might be unpopular, but it would more closely match the spending goals of transportation departments while factoring in fuel efficiency. Some states are currently considering a vehicle-miles traveled (VMT) tax or higher registration fees for electric vehicles.

Disclaimer

Please remember that the Vertex blog provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in the Vertex blog are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

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Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

Vice President of Tax Content and Chief Tax Officer

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.

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