Insights

The Connecticut Department of Banking recently fined a Connecticut registered securities broker-dealer $10,000 for overcharging customers for “postage and handling.” The fees in question ranged from $7.50 to $100 per transaction, and were imposed in addition to transaction commissions. Pursuant to the same consent order, the broker-dealer also agreed to reimburse Connecticut customers for the difference between the “postage and handling” fee charged to them for transactions between January 1, 2008, and March 31, 2010, and the actual amount incurred by the broker-dealer for postage and securities clearing services.

Inflated shipping, handling, and postage fees could potentially be challenged in some states under the theory that the name of the fee implies that the purpose of the fee is to cover shipping, handling, and/or postage costs, and not to generate profit. By way of analogy, in 2003 the Connecticut Attorney General took action against real estate brokerages that charged “compliance fees” in addition to their regular commissions. According to the Connecticut Attorney General, the real estate brokerages implied to customers that the “compliance fees” were either required or permitted by applicable law as a means of recovering the costs of complying with various government regulations. The Connecticut Attorney General entered into settlement agreements with various real estate brokerages, requiring restitution to Connecticut customers for the portion of the “compliance fee” that exceeded the actual cost of complying with government regulations.

In some states, if the consumer is told the dollar amount of the shipping and handling charge in advance, and has a reasonable opportunity to decline to enter into the transaction or otherwise avoid paying the charge, a retailer might be allowed to mark-up its shipping and handling fee (although there may be tax consequences on the retailer associated with the mark-up, as discussed in the last paragraph of this article). For instance, in Zuckerman v. BMG Direct Mktg., 290 A.D.2d 330, 737 N.Y.S.2d 14 (N.Y. App. Div. 2002), the court focused on whether the consumer was “coerced” into paying marked-up amounts for shipping and handling to a mail order retailer, and found no such coercion because the retailer had disclosed its postage and handling charges upfront. However, this line of reasoning may not always work well in the consumer financial services context, especially if the fee is imposed for the first time post-closing, in a situation where the consumer may not necessarily have a practical option for avoiding the fee.

The Direct Marketing Association (DMA) web site includes the following advice about shipping and handling charges: “Some marketers take the position that so long as there is clear disclosure on how much the consumer pays in total for the shipped product, the amount the marketer charges for shipping and handling should not matter. There appears to be a trend by law enforcement agencies, however, to insist that a consumer who is charged shipping and handling costs should be paying a fee reasonably based on the marketer’s cost. The latter position is consistent with existing DMA guidelines.” (See http://www.dmaresponsibility.org/SH/, copyrights owned by Direct Marketing Association.) The DMA advises that “[s]hipping and handling costs should be fair, reasonable, clear and justifiable.”

Postage and handling fees also may trigger sales or use tax compliance issues. Although sales and use taxes typically may not apply to certain types of consumer financial services (such as loans), they may apply to merchandise sold in connection with exempt financial services (such as checkbooks, checkbook covers, calculators, and other merchandise). In California, a retailer’s imposition of a “shipping” or postage charge may be subject to sales or use tax unless the charge meets certain specific requirements. For example, the charge should be separately stated (itemized), and may not exceed the actual cost incurred by the retailer. The mark-up of a California retailer’s actual shipping or postage cost is generally subject to sales or use tax. “Handling” charges are also generally subject to the California sales/use tax under 18 Cal. Code Reg. Section 1628. 86 Illinois Admin. Code Section 130.415 also provides that separately agreed upon shipping and handling charges are subject to the Illinois Retailers’ Occupation Tax to the extent such charges “exceed the costs of shipping, transportation or delivery.” In contrast, Tenn. Code Ann. § 67-6-102 includes the general rule that the Tennessee sales and use tax applies to transportation, shipping, postage, handling, packing, and other delivery charges imposed by retail sellers on their customers, regardless of whether these charges are marked up. 34 Texas Admin. Code Section 3.303 similarly generally treats shipping, handling and postage charges as part of the overall cost of a sale for purposes of the Texas sales and use tax. These and other state laws and regulations may influence how retailers calculate and disclose their shipping, handling, and postage charges, and the extent to which retailers mark up such fees to include a profit margin.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP. She is admitted to practice in Connecticut only. The views expressed herein are personal and not necessarily those of any employer, client, constituent or affiliate of the author. Elizabeth can be reached at 203-776-1911 or by email at eyen@hudco.com.