How Will Drone Delivery Be Taxed?

by TaxJar November 1, 2020

Last year Amazon announced that they would begin testing drone delivery. If this video is any indication, it looks pretty cool. (Never mind all those snarky remarks about “skeet shooting… but with prizes!”)

Last week, Amazon announced that the Federal Aviation Administration had approved their request to begin testing drone delivery with their “Amazon Prime Air” service. (Quickly followed by an update from Amazon that the drone model the FAA approved is already obsolete. Oops!)  Hot on the heels of the FAA announcement, Senator Cory Booker just introduced a bill that would allow the use of drones for commercial enterprises such as surveying or construction.

If all goes well, we may be seeing drones delivering our packages in the very near future.

What Does Drone Delivery Mean for FBA and other Amazon Sellers?

This news is very interesting, but one thing we immediately had questions about was, you guessed it, sales tax!

How will drone delivery be taxed?

While there are no current state laws or case law about this evolving issue, we did catch up with a couple of noted sales tax experts to ask their opinion on how drone delivery would be taxed if and when it became a reality.

CPA Sylvia Dion had this to say: “As you know, the FAA has just recently approved Amazon’s testing of drone delivery, which for now, requires that the drone remain within the pilot’s sight.  That said, I’m not sure there’s much to contemplate just yet in terms of whether Amazon’s use of drone’s will create nexus.  Just from a purely practical perspective, I think drone delivery will be limited to ‘ship to’ locations that are in close proximity, and most likely, within the same state as the Amazon warehouse from where the drone is launched.  So I don’t see a real issue with nexus creating activity as of yet.  Of course, if at some point in the future, Amazon’s drone delivery pilot program proves to be successful and the drones can travel across states borders, then I imagine states would view them no differently than they do deliveries made by a taxpayer’s own vehicles.”

Lauren Stinson of Windward Tax mentioned current state regulations around sales tax on shipping. Some states tax items differently if they are sent by common carrier (USPS, UPS, FedEx, etc.) than if they are delivered in the seller’s own vehicle.

Said Stinson: “I think that the states would follow the same theory as if a seller delivered it on their own truck (or drone, or bicycle, or by foot).  It is the entire cost of the product – including delivery to get it to the customer.   But, if a customer outsourced the drone delivery to “UPS powered by drones” (i.e. the common carrier scenario) then I think it would follow the same as if a common carrier delivered it.  For a lot of states, taxability of freight depends on FOB terms so that is something to consider too.   But, bottom line – I see it the same as delivery on a seller’s own truck because I am guessing that sellers would have their own fleet of drones.  I look forward to the day when I can have my lunch delivered to me hot via drone!”

FBA sellers, of course, commonly don’t know how their items are delivered. Because of this, Dion went on to mention that, “sellers shouldn’t worry too much about the impact of drone delivery in creating new sales tax compliance issues.”

In a nutshell, drone delivery isn’t here yet, and once it gets here, it still may not even be an issue for FBA sellers, so no need to sweat it right now.

That said, if we get to the point where eCommerce sellers are using their own drones for delivery (which seems like a long shot based on current FAA regulations) then we’ll need to take a fresh look at shipping taxability of drone delivery. Because you can bet states’ Departments of Revenue sure will!

Questions or comments on drone delivery and sales tax? Start the conversation in the comments!Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a tax advisor.

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