The world is evolving and so must sales tax. Over the last few years, increased fuel efficiency and the proliferation of electric vehicles has meant that the revenue states earn from taxes on motor fuel have unquestionably fallen. At the same time, eCommerce continues to surge. Our insatiable desire to buy stuff online and to have those things in our hands immediately means that delivery vehicles are everywhere, straining existing roads and bridges beyond their current capacity. To fill the growing fuel tax revenue gap and fund infrastructure improvements both Colorado and Minnesota have adopted Retail Delivery Fees (RDF’s) which are assessed every time an order is shipped to a customer in their state. Are Retail Delivery Fees the best way for states to replace lost fuel tax revenue or are there other, more efficient, options that states should consider before traveling down this path.
The Future of Fuel Taxes
The future is grim. According to the Tax Policy Center, the majority of state revenue comes form sales tax and individual income tax as well as funding from the federal government. While taxes on gasoline are only a small percentage of the total pie, the National Conference of State Legislatures (NCSL) tells us that fuel taxes are the largest funder for state and local transportation initiatives such as maintaining roads and bridges, with the rest made up by of vehicle use taxes, tools, license/registration fees and other such levies.
If projections are to be believed, state and federal gasoline tax revenue, which reached an all-time high of approximately $65b reached in 2020, will fall to approximately $20b by 2050. With growing demands for improved infrastructure, it’s not surprising that states are considering alternative funding sources.
Some of the options that states are already implementing to fill the funding gaps include expanded annual registration fees on electric vehicles which exist in 36 states. As you might imagine, some EV owners feel put upon when facing a larger registration fee than their gas guzzling brethren. They may feel even worse when they pull up to a public charging station once they realize that the fee for charging an electric vehicle at a public charging station is subject to standard sales tax in all but 11 states, with Utah charging a special levy at the rate of 12.5%. That may be hard enough to accept, but in a handful of states including Iowa, Oklahoma, Kentucky, Montana, and Pennsylvania, EV owners also get hit with an additional state-imposed fee per each kilowatt hour of electricity purchased. Hawaii will join these states on July 1, 2025. A smaller group of states, including Oregon and Utah, charge EV owners a fee per mile driven. Virginia gives EV owners a choice, they can pay either a per-mile fee or an annual flat fee. Of course, nothing is stopping states from allocating more funds from general revenue, which appears to be the plan in Idaho, Louisiana and North Carolina.
The Growth of eCommerce
The future is bright. Fueled by technical advancements, changing consumer behavior, innovative new market entrants, and a growing consumer demand for the most convenient shopping experience possible, eCommerce sales are on a steady upward trajectory. As reported by Digital Commerce 360 US eCommerce sales clocked in at $1.1 trillion in 2023 up from $1.04 trillion in 2022. Today, eCommerce represents 22% of total retail sales, with Statistica predicting eCommerce sales will reach $1.9 trillion by 2029. Convenience being the key, people can now shop via computers, smartphones, or even social media platforms. Soon enough artificial intelligence and augmented reality will offer hyper-personalized shopping experiences that the average consumer will find virtually impossible to resist.
Unless you are buying a digital product or service, a physical item purchased over the internet must be delivered, and right now that still happens over roads and bridges. When you throw in the notion that “big tech” might somehow foot the bill, the notion of some sort of added fee imposed on retail deliveries on internet sales come into focus.
Colorado and Minnesota Lead the Way
When considering the competing factors of eCommerce growth in conjunction with falling fuel tax revenue, it shouldn’t be surprising that states started to think about delivery fees as a way of funding state and local transportation infrastructure. Colorado was the first to the table with a retail delivery fee that became effective on July 1, 2022. Minnesota followed suit as of July 1, 2024.
This chart shows that while the fees operate similarly, they are by no means identical:
| Characteristic | Colorado | Minessota |
| Fee Amount | $.29 | $.50 |
| Marketplace Facilitators Liable | Yes | Yes |
| Per Order or Per Line | Per Order | Per Order |
| Small Seller Exclusion | Less than $500,000 of retail sales annually | Less than $1,000,000 of retail sales annually |
| Small Order Exclusion | No | Yes – Orders less than $100 |
| Option for Seller to Absorb the Fee | Yes | Yes |
| Reported on a separate Form | Yes – DR 1786 | No – but taxpayers must register to add the tax line to the standard return |
| Fee included in tax base | Yes – in some home rule localities | No |
While its true that in both Colorado and Minnesota that the RDF only applies if the order has at least one item that is taxable under applicable state law, Minnesota adds the additional wrinkle that the fee also applies on sales of non-taxable clothing. Conversely, Minnesota fee does not apply to the sale of prepared food, including restaurant deliveries. The fee also does not apply to the sale of baby products. There are no such exceptions in Colorado.
Colorado reports having collected $75.9m in FY 23 and $69.7m in FY 24. If you are wondering why tax collections dipped in the second year, when Colorado first adopted their RDF, they did not have a small seller exclusion. They amended their law effective July 1, 2023 to remove the obligation from sellers who have less than $500,000 in in-state sales.
Since Minnesota’s fee has been on the books for only a short while, no actual revenue statists exist just yet. However, they project to collect $59m in FY 25 and $65.3m by FY 27.
Other States Looking to Follow Suit
Other states are taking notice. There were bills last year in both chambers of the New York legislature. For example, Assembly Bill 06008 proposes a $3.00 fee on any “online delivery transaction” delivered to New York City while other bills applied more modest fees, some for New York city and some statewide. None have yet passed. In Nebraska, as part of a summertime special legislative session, Governor Jim Pillen is pushing hard for property tax relief. Many of the proposals being debated in the special session involve raising other taxes to make up the budget shortfall, some of which would create a new RDF.
The Washington State Joint Transportation Committee recently published a 121 page study on the wisdom of a statewide RDF becoming effective on July 1, 2026. Assuming Washington adopts a $.30 fee applying once per order containing a taxable item, the study projects $45m to $103m in revenue for FY 26, growing to $59m to $160m by FY 30. The varying revenue projections depend on whether Washington chooses to adopt a small seller exclusion of $1,000,00 and and/or an exemption for orders under $75.
The study recognizes that households that do not own a vehicle may be more likely to incur this fee but also, unexpectedly, suggests that individuals with mobility-related disabilities have relatively less online spending. Unsurprisingly, online spending increases along as household income rises and therefore people with higher incomes will pay more in retail delivery fees. On average, they expect Washington citizens would be paying between $13-$14 in delivery fees each year.
The study suggests the cost (salary, benefits, supplies, office equipment) of implementing the fee are as low as $204,900 for FY 25 and falling to $159,400 by FY 28, a drop in the bucket considering the substantial revenue projections. The study acknowledges that businesses will incur additional costs in collecting and remitting the fee. They also recognized that some of the businesses interviewed for the study expressed opposition to the fee. However, the study offers no consideration of business costs except to suggest that it “underscored the need for nuanced policy approaches to address the concerns raised.”
Nevada (in 2022) and Ohio (in 2023) have also assessed the viability of imposing an RDF in their states, but neither has moved forward with concrete legislative proposals. Both state studies gave the RDF highly favorable scores in terms of revenue stability and a moderately favorable score in all other categories against which new taxes and fees are evaluated, including efficiency, ease of administration, social equity, user equity and transparency. In terms of revenue, Ohio projected to earn $306m in CY 25, growing to $512m by CY 40. Nevada projected it would have earned $100m in CY 21.
Is this the Best Approach?
There seems to be a sentiment amongst lawmakers and regulators that Colorado and Minnesota have worked out all the kinks, paving the way for other jurisdictions to adopt retail delivery fees. In a recent article, a Colorado State Representative was quoted as suggesting that once they adopted their small seller exclusion, the business community had “accepted it and moved on.” However, that is not the case. Supporting the Colorado RDF represented a major technical initiative for sellers and for tax automation providers alike. Some of that effort was reusable when Minnesota came along, but the substantial differences between Colorado and Minnesota, especially around the $100 small order exclusion and the special treatment for clothing, food, and baby items made it a major effort as well.
If other states move forward with RDF legislation that all have subtle differences between them, businesses will face a complex network of rules and requirements that will be challenging to comply with. An RDF is, for all intents and purposes, an entirely new tax requirement that sits alongside but is also separate and distinct from sales and use tax. States have a constitutional duty to maintain tax requirements that are neither discriminatory nor unduly burdensome to out of state retailers. Adding an RDF to an already complex set of tax requirements might make, in the eyes of the judicial system, a tax system that becomes too complex to handle.
One thing that could help is the Multistate Tax Commission (MTC) and/or the Streamlined Sales Tax (SST) Governing Board stepping in and outlining uniform guidance for all states considering adopting RDF’s to follow. RDF’s currently sit outside the scope of the SST Agreement, which focuses exclusively on sales tax which is why there were no SST-related requirements or barriers for Minnesota, a full member state, to consider. If history is any guide, its possible that the MTC won’t take up the charge of uniformity until a substantial roster of states have already adopted their own fees. For example, the MTC Uniformity Committee sponsored a workgroup on the topic of marketplace facilitator collection requirements and published a comprehensive white paper on the topic, but by the time their work was done, most states had already adopted marketplace facilitator requirements.
Even still, there are perhaps simpler tax changes that could achieve the same objective of increased tax revenue directed to transportation projects without creating additional cost and complexity for the business community. States would do well to steer clear of novel requirements requiring new technical solutions in favor of adjustments that simplify and optimize existing tax compliance requirements.
One thing states should consider is whether they robustly apply their sales tax to delivery charges. Both Minnesota and Washington indeed do. Under their laws, if the item being delivered is taxable, any separate charge for shipping is also taxable. However, that’s not the case in Colorado. Colorado does not charge sales tax on delivery charges when the buyer has the option of avoiding the delivery charge by picking up the item themselves or arranging for an alternate transport. Other states likewise do not tax “optional” or “avoidable” delivery charges. Before adopting a retail delivery fee, every state should at least consider the far less disruptive step of expanding how they tax delivery. Colorado did not have that option as their Taxpayer Bill of Rights prohibits any tax increases without a voter referendum.
Another alternative could be a very small increased sales tax rate on delivery charges. Across the country, there are all sorts of products that are taxed at special, increased rates. This is an established approach for items like tobacco, vaping products, firearms, ammunition, fuel, and other goods that impose a disproportionate cost on society. In most circumstances, sellers and tax automation providers could tweak the rate applied to a given type of transaction with a small change in their compliance solutions. The only challenge here, and it’s a significant one, is that most states charge sales tax on delivery charges based on the premise that they are part of the sales price of the underlying item being delivered. Separating the tax rate on the delivery charge from the tax rate applied to the item being shipped could be nearly as complex as an RDF.
Of course, the simplest thing would be a super small increase to the standard sales tax rate and allocating more money out of the general fund for maintaining roads and bridges.
If in the end, a state chooses to adopt a delivery fee, they should do so in the simplest way possible. Excluding or including certain products based on social or political concerns that vary from state to state, will make nationwide compliance extraordinarily challenging.
Concluding Thoughts
Sales tax must evolve to keep up with technological and societal developments. States are wise to plan for a future where fuel taxes will not bring in the same tax dollars they used to. However, as states consider new rules and requirements, they must constantly strive to put forward requirements that not only consider ease of administration and social equity but also contemplate whether sellers will be able to readily adjust their systems and solutions to meet the new obligation. To do otherwise risks sending us down a path where manageable compliance becomes an overwhelming burden.
