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Should sales people include sales tax on quotes? What if order is accepted but customer requests drop-ship to other state?

Full Question: What would be the best procedure that should be done in handling the following circumstances; salesman quotes pricing on job to a customer, the salesman includes sales tax on the quote. Customer excepts quote, however the product ends up being dropped shipped into a state for which our company does not have nexus (physical presence) therefore we are not registered to collect sales tax. Customer wants the sales tax charged or states that they will go to a different supplier. If we register for the sales tax then are we not opening up to have to do an income tax return for that state? How do other companies handle these types of situations?

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Answer:

Diane Yetter photoYour question raises a few different issues - the first is how should you issue quotes to customers in relation to sales tax and the second relates to voluntary registration to collect sales tax. On the first, the decision as to whether to include sales tax on a quote to a customer varies by company. I don't have many clients that include sales tax on a quote, but will on a sales order but only in states where they are registered to collect the tax. If your system includes sales tax on quotes for an amount for all states including those where you are not registered, you may want to include language such as "Quoted Sales Tax is an estimate only based on information provided in the quote. Sales Tax will be included only for shipments into states where we are registered to collect sales tax. Customer will be liable for use tax if shipment is requested into a state where we are not registered to collect tax". In terms of how to deal with the current situation, it sounds like the original quote had the goods shipping into a state where you are registered but then the order changed the delivery address. I suggest you communicate to the customer that the quote was based on the address they provided at the time of the quote and that your company is not registered and is not required to be registered in the delivery state. Therefore, you do not have the legal authority to collect the tax. They should remit the use tax as appropriate. As to the second question which is should you voluntarily register to collect tax in states where you are not otherwise required to do so as you do not have nexus. This is a business decision that should be evaluated carefully. Once you register to collect sales tax in a state, you are subject to all the sales tax laws of the state which require you to collect sales tax on all taxable sales into the state - not just sales to the customer that has requested you to register. In addition, you are required to collect and maintain exemption certificates, file returns and can be subject to audits. If you truly do not have nexus, I suggest you evaluate if the business this customer will bring you is worth the extra administrative burden. Whether or not voluntarily registering for sales tax subjects you to income tax is based on your facts. If you don't have nexus for sales tax, it is likely you don't have nexus for income tax. But, your activities should be evaluated for both taxes to determine if you do actually have nexus. We do provide nexus evaluation services and would be happy to talk with you about our approach if you are interested. BTW - For more information on drop-shipments, please consider our Tax Implications of Drop-Shipments Webinar or the book we wrote (published by CCH) Drop Shipments: Taxation, Compliance and Planning. If you need further assistance with this matter, please feel free to contact us directly.

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