As state and local governments look for revenue to close budget gaps and fund services, some have targeted specific industries and business activities. Among the affected industries is retail, particularly as some policymakers focus on e-commerce, delivery, and last-mile logistics. To make certain measures easier to enact, some states and localities have labeled new charges as “fees,” rather than taxes, because fees may avoid some of the procedural and political hurdles that apply to taxes. For example, in some jurisdictions taxes may be subject to supermajority vote requirements, fees often are not. But retailers should not assume that a charge labeled as “fee” is immune to any such procedural requirements if the charge is really a tax.
The distinction between “tax” and “fee” matters. A tax is generally imposed to raise revenue for general governmental purposes and is not tied to a direct benefit for the payer. A fee, by contrast, is usually connected to a specific service, privilege, regulatory program, or cost imposed by the payer. Generally, fees bear a reasonable relationship to the cost of providing the service or administering the regulatory activity. If a charge functions primarily as a revenue raiser, the “fee” label may be vulnerable.
Retail delivery fees illustrate the issue. A good example is Colorado’s retail delivery fee, the first of its kind, which took effect in July 2022. It applies to taxable retail sales delivered by motor vehicle. Because the fee applies only when a taxable retail sale is delivered, it has created meaningful compliance challenges for retailers because they must determine when the fee applies and how to administer it across systems, invoices, and various different types of customer-facing transactions. Colorado regulators initially required that the fee be separately stated on invoices. However, the state has since removed the requirement which may ease some customer-facing compliance burdens, but these changes do not address basic taxability concerns. Thus, if a retailer chooses not to separately state the fee, it may effectively absorb the cost, creating a financial burden of its own.
Minnesota followed Colorado by enacting a similar retail delivery fee that took effect in July 2024. Minnesota’s fee applies only to certain transactions over $100. Collection from customers is optional, and if the retailer passes the fee through, it must be label the fee on the customer’s invoice.
Though other states and localities have introduced similar retail delivery fee proposals, Colorado and Minnesota are the only two states that have enacted such fees to date. Even so, retailers may see continued interest in these measures from governments looking for new revenue sources and seeking to respond to policy concerns associated with retail delivery.
Retailers facing these proposals or existing fees should consider evaluating the operational and compliance costs of these charges. They may also wish to confirm whether the charges are legally distinguishable from a tax and whether the state or locality satisfied the requirements for adoption. If conducting such review, retailers should consider noting whether the charge applies to the their transactions, whether they can pass the charge through to customers, whether invoices and systems can support proper labeling, and whether the fee bears a reasonable relationship to the governmental service or regulatory activity it is intended to fund.