Do I include the shipping and handling on books in collection expense?

Yes.

In an ideal, perfect world, shipping and handling would be part of "other operating expense."  However, asking libraries to separate this out would be an enormous reporting burden, and the resulting accuracy may not be of statistical significance.  For almost all public libraries, the ability to drive across town and pick up the wide array of materials needed from a local vendor is pure fantasy.  From a state perspective, paying shipping and handling for materials is a normal, unavoidable part of the cost of acquiring them.