In our first two posts, we looked at the ten most restrictive states for drop-shipping: California, Connecticut, District of Columbia, Florida, Hawaii, Louisiana, Maryland, Massachusetts, Mississippi, and Tennessee. These are the states which assert, that if a certificate is required, the certificate is generally valid only if the issuer is registered in that state.
Therefore, if the supplier (usually a manufacturer or distributor) has nexus in one of these states, then their customer (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 (the reseller). There are some exceptions, especially in the states of FL & LA, but we suggest you refer to our previous posts for more detail.
In some of the above-mentioned states, under certain limited circumstances the reseller’s customer’s exemption may possibly be passed through. Again, please refer to some of my previous posts for more detail.
In today’s post we will cover the following states: IL, NY, PA and TX.
As in our previous posts, we believe it is important to review the following five drop shipping basics discussed in more detail in our post about the six most restrictive states.
A drop shipment is really two different sales transactions. The first transaction is between the final consumer and the reseller and the second is between the reseller and the supplier.
- The second transaction is where the focus should be.
- Remember that sellers must collect sales tax or a certificate in lieu of sales tax wherever they are registered and the product/service is not exempt.
- When it comes to interstate sales of tangible personal property (TPP), sales tax is almost always due in the “ship-to” state. Therefore, the “ship-to” state is the state whose tax or certificate must be collected.
- The obligation of a seller (supplier) to collect sales tax is based on where the seller (the supplier) has nexus, not where the purchaser (reseller) has nexus.
Here’s the bottom line: If you think about it from the supplier’s viewpoint: The supplier is making a sale to a customer (the reseller) but shipping it to a certain location. If the supplier has nexus in that location, then 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. The supplier is in a bind here, because a sale for resale is not an exempt sale, unless it can be properly documented in a form that is acceptable to the ship-to state. Many times, that means the ship-to state requires a resale certificate sanctioned by the ship-to state, completed by someone registered in that state. The problem is that most resellers do not have nexus in more than their home state, but they have customers in many states. As a result, the reseller, is not registered in that state, and cannot issue the certificate required by that state. The reseller is in a bind too. The reseller cannot charge tax to the final consumer, and the reseller cannot issue a resale certificate (from the ship-to state) to the supplier. The reseller ends up having to pay tax to the supplier or get registered in the ship-to state even though the reseller does not have nexus in that state. Recognizing this dilemma, many states allow for alternative types of documentation to be supplied by a reseller, but other states do not allow any alternative to their own form Each state has different rules as to what they allow 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 where the reseller is not required to register to collect and remit tax in order to issue a proper resale certificate when the customer ship-to address is in that state. However, they are restrictive in what they will accept which generally makes life a little tougher than the balance of the states, which we will cover in future posts.
Illinois - Illinois is different then most states for a couple of reasons. The first is that they provide for a registration, specifically for resellers with no taxable sales in IL. When you take advantage of this registration you are provided with a resale number which can be used on the IL resale certificate. However, this type of registration does not allow, nor does it require the collection or remittance of any taxes. Registration is fairly easy and you generally do not have have any additional responsibilities as long as you do not have any taxable sales. Make sure you do not inadvertently register for the Retailers Occupation/Use tax.
The second reason IL is different then most states is because they will allow documentation other than the IL resale certificates, however the state cautions that whatever is accepted other than an IL resale certificate, will be subject to additional verification by an auditor. In other words, the auditor has the right to ask for additional documentation, which if cannot be provided the sale could become taxable. It is for this reason, that we strongly suggest suppliers institute a best practice of only accepting an IL resale certificate. For purchasers, we suggest registering for the resale number as many of your vendors will require it You will not be asked for additional documentation down the road, and it’s a one time event that does not require tax collection or remittance.
New York - New York will only accept a NY resale certificate. However, the state makes life pretty easy for you. You can do a Google search for a NY resale certificate and you should be able to download a fillable form. The NY certificate has different sections on it to complete depending on whether you have nexus or not. So if you do not have nexus, you would complete the top of the form and then skip Section One. You would then complete Section Two, where you would enter your home state permit number. Complete the form and it’s ready for your vendor.
Pennsylvania - Pennsylvania is very similar to NY. They will only accept their own state certificate. However, you can do a Google search and download a form from the internet. On this form you will fill out the top of the form and then check boxes 3 & 7. On line three you can either leave the spot for the PA number blank or put an N/A in the space. On line 7 you would state that you do not have nexus in PA. You would then complete the form and provide it to your vendor.
Texas - Texas has a resale certificate that can also be downloaded from the internet. In the top section you can either write in your Texas permit number or directly below it you can write in your home state number.
Texas will accept other states’ resale certificates, however, they must contain all the required information and be “substantially” in the form of the Texas resale certificate. Since substantially is a subjective term and we have seen auditors invalidate other states’ certificates, we suggest as a best practice that purchasers issue, and sellers accept only the Texas certificate.
While these four states are easy to compare to the first ten states, we suggest that both purchasers and sellers pay attention to the fact that NY and PA will only accept their own states’ forms and that as a best practice you only issue or accept the IL and TX forms.
The balance of the states accept multiple types of alternative documentation and we will cover then in groups of five alphabetically.
Coming up - In our next post we will discuss AL, AR, AZ, CO, and GA.
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