In our last post entitled, The Six Most Restrictive States, we looked at California, the District of Columbia, Maryland, Massachusetts, Mississippi, and Tennessee. These are the states which assert that a certificate is only valid if the issuer is registered in that state.
Therefore, if the supplier, usually a manufacturer or distributor, has nexus in these states, then their customer the reseller, usually a retailer or another distributor, must generally be either registered in the state in order to issue a valid certificate or the supplier must collect the sales tax from their customer which is the reseller. Please refer to our previous post for more detail.
In today’s post we will cover the following states: Connecticut, Florida, Hawaii, and Louisiana. These states are very restrictive and follow closely behind The Six Most Restrictive.
Before we go further, let’s review five drop shipping basics discussed in our first post.
A drop shipment is two sales. Consumer to reseller and then reseller to supplier.
The second transaction is the key.
Sellers must collect sales tax or a certificate in lieu of sales tax wherever they are registered and the product/service is not exempt.
Interstate sales of tangible personal property (TPP) are almost always sourced to the “ship-to” state. When we say “sourced”, we mean that is the state whose tax or certificate must be collected.
The obligation of a seller (supplier) to collect sales tax is based on where they (the supplier) have nexus, not where the purchaser (reseller) has nexus.
Here’s the bottom line: the supplier must collect the sales tax for the ship-to state or they must collect the certificate in lieu of the sales tax that is acceptable to the ship-to state. A sale is for resale, is not an exempt sale, unless it can not be properly documented in the ship-to state. Each state has different rules which makes this confusing as to what documentation can be provided or accepted. So let's move on to the state specifics.
The following states are those that sometimes create the most confusion either because the state's guidance is difficult to follow, there are different rules than the other states, a certificate is only required in certain circumstances or the certificate does not relieve the purchaser entirely from having to pay tax. Due to the above, many companies choose conservative policies rather than following a state’s requirements.
Connecticut - In most states the supplier is required to collect the tax from the reseller if the reseller is not registered in the ship-to state. However, this is not always the case in Connecticut. If the supplier is registered but located out of state then the supplier is required to collect the tax from the consumer. The exception to this “drop shipment” rule is if the transaction was FOB origin, rather than FOB destination, and delivery was made by common carrier. In this case, the sale is deemed to have been made outside of CT and no tax is due. If the supplier is located in CT, or the delivery is made in the supplier's trucks, then the drop shipment rule is applicable. In some instances a consumer's certificate can be passed through.
If a certificate is required, the issuer must be registered in CT. Since the supplier does not generally have a relationship with the consumer, many suppliers will only deal with registered resellers or end up collecting the tax from the reseller rather than the consumer. If a certificate is required the issuer must be registered in CT. The tax basis is the price to the consumer if known or the wholesale price if not.
Florida - Florida looks at where the inventory is located at the beginning of a transaction. If it is located outside of Florida, even though the supplier has nexus in Florida, then Florida does not recognize this as a Florida-sourced sale and no tax is due. Florida still recommends that a resale certificate be collected on this transaction to document the sale as a sale for resale, however the certificate does not have to be the Florida certificate.
But, if the inventory was located inside of FL at the beginning of the transaction, Florida considers this a FL sourced sale and the reseller must provide a valid Florida certificate or the supplier must collect the sales tax. FL certificates expire annually and you must be registered in FL to have one.
Some companies who have inventory within and outside of FL, will only accept a valid FL certificate in order to simplify their exemption certificate collection process.
Hawaii - Hawaii is truly different than all the other states as their General Excise Tax (GET) is an obligation of the seller, which the seller can pass through to the purchaser if they so choose. While this by itself does not make HI unique, the fact that HI generally sees this as a contractual issue between the the seller and purchaser, and the acceptance of a certificate, even a valid HI certificate, does not absolve the seller from having to collect a tax.
If the supplier decides to pass the tax along, and most do, then the reseller must pay the 4% GET. The only way to avoid paying the 4% GET is by registering in HI. However, this does not absolve you from paying the tax, it only allows you to pay at the reduced wholesale rate of 0.5%.
Louisiana - Louisiana repealed their advance sales tax effective January 1, 2009. There are letter ruling’s prior to that time that generally follow the situation in Florida. If the inventory is outside the state at the time of the transaction it is not a LA sale and if it is in state it is a LA sale. We do not see where LA has provided any guidance since then. We advise our clients to collect a valid certificate or the tax if the inventory started in LA at the beginning of the transaction. A valid certificate is one where the issuer is registered in LA.
As in Florida, some companies who have inventory within and outside of LA, will only accept a valid LA certificate in order to simplify their exemption certificate collection process.
Whether you are a supplier or a reseller, it is most important to pay extra attention to these four states. Since these states are very restrictive in many situations, as a supplier you want to make sure you are collecting a valid certificate or the tax when necessary. As a reseller, if you are being charged tax by your suppliers and the dollar amount is material, you may want to explore getting registered voluntarily. This way the tax comes out of your customers pocket rather than your pocket.
Coming up - In our next post we will discuss IL, NY, PA, and TX.
BTW - If you have any questions or comments please feel free to submit below - or reach out to me directly using the contact options on my Firm Profile Page.
Other recent “Exemption Certificate Mgmt.” posts by Michael J. Fleming:
- Drop Shipping Exemption Certificates For AL, AR, AZ, CO and GA.
- Drop Shipping Exemption Certificates For IL, NY, PA, & TX
- Drop Ship Exemption Certificates: Four More Restrictive States
- Minnesota Simplifies Exemption Process - and Gets It Right!
- Dropship Exemption Certificates: The 6 "Most Restrictive" States