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If drop ship customer picks up order from vendor, do we charge sales tax? What if vendor performs additional service prior to pick-up?

Full Question: We purchased material from a vendor in MS (exempt from tax based on resale - we are registered with MS) The material is shipped (title transfer) to our customer C/O our vendor in MS. This vendor presumably will be performing a service on the material that has been sold to our customer. Our customer is located in AL and does not hold a MS sales tax permit and is not registered with the state of MS. The customer has provided their AL exemption certificate. Are we requited to charge MS sales tax? If the customer picks up the material from our vendor in MS rather than it being title transferred, are we obligated to charge MS sales tax?

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Answer:

Diane Yetter photoYour question involves a drop shipment transaction which does have very specific rules by state. My answer is based on the facts as I understand them - which are not completely clear in terms of the vendor. Here is how I'm assuming the transaction. Your company purchases goods from a vendor in MS for resale. You are registered in MS and have issued a resale certificate to vendor. You request your vendor to ship directly to your customer with an address in MS which happens to be the vendor. Title transfers to your customer at the vendor's location so the delivery is in MS. At some point in the future, the vendor ships the goods to the customer's ultimate location in AL. MS is a state that has very strict rules on drop shipments. A distributor like your company can only issue a MS resale certificate with a MS registration number on it to claim exemption if you request your supplier to ship goods to a location in MS. Since you are registered in MS, you can issue a resale certificate to your vendor and they should not charge you tax even though the goods transferred title to your customer at their location in MS. Your company is required to charge your customer MS tax since delivery occurred in MS unless they can provide you with a valid MS exemption number. Since they have only provided you with an AL exemption certificate, you are required to charge MS tax since you transferred title to them in MS. Having the customer pick up the goods at the vendor's location will still result in MS tax being due as title will transfer in MS. An option to be able to accept the AL certificate would be that title to the goods is not transferred and your sale to them does not occur until after any work is done by your vendor. So, you would still own the goods while any works is being done to it in MS. Once completed, then the sale from you to the Customer could occur with your vendor drop shipping the goods to AL. This may not be possible due to the nature of the work or transaction. Appropriate title transfer and invoicing must support the change in the transaction. If we can be of further assistance, we would be happy to discuss a consulting arrangement. 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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