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We are a dealer/reseller located in PA. Can sales tax be charged twice on the same material if it is drop shipped?

Full Question: We are a dealer/reseller located in PA. Our vendor is located in MI and our customer is located in MD. We have no nexus in MD. However our customer is requiring us to collect the sales tax from them. If our vendor drop ships to our customer and collects MD sales tax from us on the net price of the material...Do we then collect it from our customer on the resale price of the same material? Can sales tax be charged twice on the same material if it is drop shipped? For example, we buy MATERIAL from our MI vendor for $5,000. Since we are drop shipping to MD, our vendor collects 6% MD sales tax of $300 from us. We mark-up the MATERIAL 50% and resell to our customer for $10,000 plus also charge 6% MD sales tax of $600. That's now $900 sales tax collected on the same material. As an out-of-state reseller with no nexus in MD, do we still need to remit anything directly to MD since we already paid sales tax to our vendor on the material? Or are we cleared from liability?

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Answer:

Diane Yetter photoThe situation you are describing is referred to as a drop shipment transaction. These can create significant issues for smaller distributors who are not registered in every state where they have customers but have their supplier drop ship goods to these customers. Unfortunately Maryland is one of the more restrictive states in terms of the dropshipment rules for sales tax. In order to avoid your supplier charging you sales tax you must register with the state of Maryland as a seller to collect sales tax. Maryland will not accept any other documentation other than a Maryland resale certificate to eliminate the need for your supplier to charge you tax. Without that registration and resale certificate to provide to your supplier, they are required to charge you sales tax on the price they charge you for any orders they ship to Maryland. This tax becomes part of your cost base and you are not allowed to show this tax amount paid to your supplier on your invoice. Additionally since you are not registered you can not and should not invoice your customer Maryland sales tax. If you are not registered, your customer has the obligation to pay the use tax directly to Maryland. In your example, here is what needs to happen if you are not registered: Invoice from Supplier to you: $5,000 plus $300 tax. You pay them $5,300. This becomes your cost. Invoice from you to your customer: $10,000 with no tax. Your cost is $5,300 so your markup is $4700 instead of $5000. Customer use tax obligation: $600 - they will owe 6% on the $10,000 that they will pay directly to MD. You can not show the tax you paid your supplier on the invoice and yes you are correct that MD ended up getting $900 tax instead of the $600 that they are owed. This is because you are not registered to collect MD tax. If you did actually collect the $600 on the transaction you should refund it to your customer as they will still have to pay it as you are not registered. If you remitted it to your home state, you need to file a refund claim with them. If you filed it with MD, they likely are going to register you for sales tax. If that happens, you might be able to get a refund of the $300 you paid to your supplier.

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