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We are located in CO but drop-ship nationwide. Do I need to register in every state? Which forms do I need? .

Full Question: We are located in CO but sell nationwide. Our supplier is located outside of CO and does "drop shipments" to our customers. I provided our supplier with a CO resale certificate, but they tell me I have to register in every state in order to exempt the tax. Is this true? What if our customers provide us with a tax exemption form for their home state? What forms should I be providing our supplier?

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Answer:

Diane Yetter photoThis is a very common question and one that creates much confusion in the sales/use tax area. The general rule that applies in states is that in order for a registered seller to not collect tax is that they must have a valid exemption certificate from their customer. Typically that must be a certificate from the ship to state. Or at least one that is deemed valid by the ship to state. Drop Shipment transactions raise many issues as often the distributor/middle man is not registered in the ship to state but the manufacturer/shipper is. Therefore the manufacturer/shipped is obligated to collect tax on the drop ship transaction unless valid exemption documentation is provided. Luckily many of the states recognize the drop shipment transaction as a sale for resale which is exempt from sales/use tax and have come up with alternate documentation rules. This could vary from the distributor's home state resale certificate, the MTC Multi-Jurisdictional Exemption Certificate, the Streamlined Sales Tax Exemption Certificate, the ship to state resale certificate with the home state number or a no nexus statement or other alternative documentation that demonstrates that the transaction truly is a sale for resale. In some states, if the distributor's customer is claiming an exemption, this certificate could be "passed through" to the manufacturer/shipper to claim the exemption. However, there are still about 11 states that require a resale certificate with a registration number in their state to be issued to document the resale exemption. This requires the distributor to be registered to collect tax in these states. The distributor would then be able to issue a resale certificate but it does than have the requirement to collect and remit the appropriate sales/use tax on all transactions shipped into the state. If you subscribe to CCH IntelliConnect Tax Research, we have written a publication that is available there. For more information, see Drop Shipments in Sales Tax Research & Compliance Manager We can also work with you to evaluate your activities and determine which states would accept your CO resale certificate as there are some specifics in some states that could change the answer.

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