Freight is generally not taxable in Colorado, but only when the delivery charge is stated on a separate line on the invoice and the buyer had a real alternative to your delivery service. Miss either condition and the shipping charge gets folded into the sale price and taxed at the same rate as the goods. A separate per-order Retail Delivery Fee applies on top of sales tax, and home-rule cities can write their own rules that override the state answer within their limits.
The Two-Part Test
Colorado’s Special Rule 18 starts from a presumption that moving goods from seller to buyer is a service, not a taxable sale. To keep that presumption, a freight charge has to clear two conditions at the same time.1Legal Information Institute. 1 CCR 201-5 – Sales and Use Tax – Special Rules
The first is separately stated. The delivery cost has to appear as its own line item on the bill, distinct from the price of what the customer bought. Bury it in the product price and the exclusion is gone.
The second is separable. A charge is separable when the buyer genuinely had an alternative: in-store pickup, or the option to arrange their own carrier. If your delivery is the only way the customer can take possession of the goods, the charge is not separable and gets taxed even if you list it on its own line.
What Counts as a Transportation Charge
The regulation defines transportation charges broadly. Freight, shipping, postage, delivery, handling, mileage, trip charges, standby fees, and similar costs all fall inside the definition.1Legal Information Institute. 1 CCR 201-5 – Sales and Use Tax – Special Rules Handling is worth flagging: many sellers assume handling fees are automatically taxable, but under Colorado’s rule they get the same presumption of non-taxability as freight, provided both parts of the test are met. Roll handling into the product price rather than breaking it out and you lose the exclusion for that portion.
When Freight Becomes Taxable
Three situations pull a delivery charge back into the taxable sale price:
- The charge is embedded in the product price. A listing at “$150 with free shipping” is taxed on the full $150 because nothing is separately stated.
- The charge is not separable. If the customer has no realistic way to obtain the goods other than through your delivery, a separate line item alone will not save it.
- The line item mixes transportation with services that fall outside the regulation’s definition, such as assembly, installation, or custom fabrication. The non-transportation portion is not exempt, and bundling it in risks tainting the whole line.
Colorado defines the purchase price as the gross value of all materials, labor, service, and profit charged to the buyer, unless an exclusion applies.2Justia Law. Colorado Revised Statutes Title 39-26-102 – Definitions A freight charge that fails the two-part test lands inside that purchase price and is taxed at the same rate as the product.
When Freight Is Not Taxable
A delivery charge escapes tax when both parts of the test are satisfied. Sell a $500 piece of furniture, show a $75 delivery line on the invoice, and give the buyer the option of picking it up at the store, and sales tax applies only to the $500.1Legal Information Institute. 1 CCR 201-5 – Sales and Use Tax – Special Rules
Freight also is not taxed when the underlying goods are exempt. The taxability of the delivery follows the taxability of what is being delivered. Ship exempt agricultural equipment or exempt food with a separately stated shipping line and that shipping charge is exempt too.
Shipments With Both Taxable and Exempt Goods
When one delivery contains both taxable and exempt items, the freight charge has to be allocated between them on a reasonable basis. Prorating by relative purchase price is the most common approach: if taxable goods are 70% of the order total and exempt goods are 30%, then 70% of the separately stated freight is subject to sales tax and 30% is not.
Allocation by weight or another method that reflects the actual cost of moving each category is also acceptable. Pick one approach, apply it consistently, and keep the calculation on file. Auditors are looking for a defensible methodology, not a specific formula.
The Retail Delivery Fee
Colorado imposes a Retail Delivery Fee separately from sales tax on every order that is delivered by motor vehicle to a Colorado address and includes at least one item of taxable tangible personal property.3Colorado Department of Revenue. Retail Delivery Fee It is charged once per order, no matter how many items or packages are in the shipment.
The fee adjusts each July for inflation. From July 2025 through June 2026 the total is $0.28 per delivery.4Department of Revenue – Taxation. Retail Delivery Fee Rates The Colorado Department of Revenue publishes the following July’s rate by April 15 each year.
A small-seller carve-out applies. Retailers whose total Colorado sales of tangible personal property, commodities, or services were $500,000 or less in the previous calendar year are exempt from collecting the fee. New retailers with no prior-year Colorado sales are exempt until they cross the $500,000 mark in the current year.
The Retail Delivery Fee itself is not subject to state sales tax, but some self-collecting home-rule cities may apply their own local sales tax to it.
Home-Rule Cities Can Change the Answer
The state-level rules are only part of the picture. Dozens of home-rule cities in Colorado run their own sales and use tax systems and set their own definitions of what is taxable.5Colorado Department of Revenue. Local Government Sales Tax That authority reaches delivery charges. A freight charge that clears the two-part state test can still be fully taxable in a home-rule city that treats all delivery charges as part of the sale price.
There is no single master list. The Colorado Department of Revenue’s GIS lookup gives the sales tax rate for any address, including county, municipal, and special district rates.6Department of Revenue – Taxation. How to Look Up Location Codes and Tax Rates For whether a specific home-rule city taxes freight, though, that city’s finance or tax department is the definitive source, because those cities set their own rules independently of state regulations.
Penalties for Getting It Wrong
Treating taxable freight as exempt, or missing the Retail Delivery Fee, exposes a business to penalties and interest. The sales tax penalty for failure to file, pay, or correctly account for the tax owed is the greater of $15 or 10% of the unpaid tax, plus 0.5% for each month the balance is outstanding, capped at a combined 18%.7Department of Revenue – Taxation. Tax Topics: Penalties and Interest Late payment also forfeits the vendor service fee that retailers can otherwise keep as compensation for collecting the tax.
Interest runs from the original due date until the tax is paid. For 2026, the discounted rate is 8% if the business pays before receiving a notice of deficiency or within 30 days of receiving one; after that, the rate rises to 11%.7Department of Revenue – Taxation. Tax Topics: Penalties and Interest The Retail Delivery Fee uses the same structure: the greater of $15 or 10% of the fee due, plus 0.5% per month up to 18%.8Colorado Department of Revenue – Taxation. Penalties and Interest
Records That Support the Exclusion
Colorado requires businesses to retain invoices for goods purchased for resale, along with related shipping and tax records, for at least three years.9Colorado Department of Revenue. Points of Compliance Brochure Longer is safer, since an audit can reach back further where the state suspects fraud or a failure to file.
For freight specifically, the records that carry the weight are invoices showing delivery as a separate line, documentation that the buyer had a genuine pickup or alternative shipping option, and, for mixed shipments, the calculation showing how freight was split between taxable and exempt goods. Those three items are what an auditor asks for.