I've been getting a lot of questions lately from clients about drop shipments. These types of transactions can get complicated depending on the particular state or states involved; and there can be a number of issues with resale certificates, collecting sales tax and so on. Since most of my clients are located here in the Empire State, I never get any questions about how New York treats drop shipments, so I thought I'd write a quick post about this topic and hopefully answer some questions for those of you in other states.
The NYS Department of Taxation and Finance published Tax Bulletin ST-190 to explain the sales tax treatment of drop shipment sales. Typically, a drop shipment consists of two separate transactions or sales: a sale from a supplier to a retailer and a sale from the retailer to their customer. If all three parties in these transactions are located in New York State, there should not be any issues. The retailer issues a Resale Certificate (ST-120) to their supplier, then the retailer collects and remits the applicable amount of sales tax from their customer. However, when the retailer is not located in the same state as their customer or the supplier, problems arise because the retailer may not be able to issue a resale certificate. Many states, including New York, require a vendor to have a valid Certificate of Authority in order to use an exemption certificate. If the retailer cannot issue a resale or exemption certificate to the supplier, then the supplier will need to charge the retailer sales tax on a sale for resale.
Fortunately, New York makes an exception for "qualified out-of-state purchasers" who are purchasing tangible personal property for resale purposes, as long as the out-of-state purchaser:
- is not registered or required to be registered for sales tax purposes with the NYS Tax Department; and,
- is registered with another state, the District of Columbia, a province of Canada, or other country, or has its only location in a state, province, or country that does not require registration; and,
- is purchasing items for resale that will be either (1) delivered to their customer or unaffiliated fulfillment services provider located in New York or (2) delivered to the purchaser in New York, but then resold from a business located outside the state.
A qualified out-of-state purchaser can only purchase tangible personal property for resale and cannot use the Resale Certificate to purchase taxable services for resale, as this would cause the purchaser to qualify as a vendor for New York sales & use tax purposes.
While this is a good answer for the out-of-state retailer, who avoids paying sales tax on a purchase they are reselling, there are other issues that need to be considered. Does the retailer have nexus with New York State, and should they actually be registered to collect and remit tax on their sales? If the retailer has employees, independent contractors or other affiliates soliciting sales in the state on their behalf, there's a strong likelihood they have nexus. If they are performing any installation, repair, or maintenance services in the state, they will have nexus. Furthermore, it's shouldn't come as a surprise that the NYS Department of Taxation and Finance stringently enforces their click-through and affiliate nexus laws while aggressively pursuing out-of-state businesses selling into the state. These issues should be considered by the retailer before completing a Resale Certificate that includes their name, address and checked boxes indicating they're a "qualified out-of-state purchaser," because these documents may potentially be audited at some point in the future.
Other recent “New York (NY)” posts by Tom Mazurek, CPA:
- New York Sales Tax: Drop Shipments & Resale Certificates
- New York: Taxing Computer Software
- Sales Tax Free Zone in Buffalo
- Sales Tax Provisions Included in 2015-16 New York Budget
- New York: Capital Improvements v. Repairs to Real Property