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If we drop-ship parts to a machining house in Arizona and our end customer is based in Canada - are they subject to sales tax or need to provide exemption certificate?

Full Question: If we drop-ship some parts to a machining house in Arizona (for example), and our end customer is based in Canada, are they subject to sales tax? Do I need to ask for an exemption certificate?

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Answer:

Diane Yetter photoThe answer to your question will depend on whether the machining house is still part of the manufacturing process and you maintain ownership of the property or whether you are shipping to the machining house on behalf of your Canadian customer. If the property is still in your possession and the AZ machining house is part of your manufacturing process the goods are still in the stream of retail sale and have not transferred to the customer and no sale has occurred so no AZ exemption certificate would be required. If however, the Canadian customer has purchased the goods from you and has asked you to ship the goods to their machining shop in AZ, then this is considered a sale and you must determine if an exemption applies and if so, what documentation applies. If your Canadian customer is the end user and there is no applicable exemption that applies on their purchase, then delivery has occurred in AZ and AZ tax must be collected. If your Canadian customer is reselling the items, then it is likely a drop shipment situation could be argued and alternative documentation can be provided. Assuming your Canadian customer is not registered in AZ and can not issue an AZ exemption certificate, then AZ will accept alternative exemption documentation. The type of certificate AZ accepts in a drop shipment situation is a home state resale certificate. If your Canadian customer is not registered anywhere in the US, I would assume an exemption certificate from Canada or their province would be acceptable. In the alternative, I would suggest completing an AZ resale certificate and include the GST and PST registration numbers and a statement that the customer is not required to be registered in AZ as they don't have nexus but are reselling the goods in Canada.

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