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Drop Ship Exemption Certificates: Four More Restrictive States

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In our last post entitled, The Six Most Restrictive States, we looked at  California, the District of Columbia, Maryland, Massachusetts, Mississippi, and Tennessee. These are the states which assert that a certificate is only valid if the issuer is registered in that state.

Therefore, if the supplier, usually a manufacturer or distributor, has nexus in these states, then their customer the reseller, usually a retailer or another distributor, must generally be either registered in the state in order to issue a valid certificate or the supplier must collect the sales tax from their customer which is the reseller. Please refer to our previous post for more detail.

In today’s post we will cover the following states: Connecticut, Florida, Hawaii, and Louisiana. These states are very restrictive and follow closely behind The Six Most Restrictive.

A Review:

Before we go further, let’s review five drop shipping basics discussed in our first post.

  1. A drop shipment is two sales. Consumer to reseller and then reseller to supplier.

  2. The second transaction is the key.

  3. Sellers must collect sales tax or a certificate in lieu of sales tax wherever they are registered and the product/service is not exempt.

  4. Interstate sales of tangible personal property (TPP) are almost always sourced to the “ship-to” state. When we say “sourced”, we mean that is the state whose tax or certificate must be collected.

  5. The obligation of a seller (supplier) to collect sales tax is based on where they (the supplier) have nexus, not where the purchaser (reseller) has nexus.

Here’s the bottom line: the supplier must collect the sales tax for the ship-to state or they must collect the certificate in lieu of the sales tax that is acceptable to the ship-to state. A sale is for resale, is not an exempt sale, unless  it can not be properly documented in the ship-to state. Each state has different rules which makes this confusing as to what documentation can be provided or accepted. So let's move on to the state specifics.

State Specifics

The following states are those that sometimes create the most confusion either because the state's guidance is difficult to follow, there are different rules than the other states, a certificate is only required in certain circumstances or the certificate does not relieve the purchaser entirely from having to pay tax. Due to the above, many companies choose conservative policies rather than following a state’s requirements.  

Connecticut - In most states the supplier is required to collect the tax from the reseller if the reseller is not registered in the ship-to state. However, this is not always the case in Connecticut. If the supplier is registered but located out of state then the supplier is required to collect the tax from the consumer. The exception to this “drop shipment” rule is if the transaction was FOB origin, rather than FOB destination, and delivery was made by common carrier. In this case, the sale is deemed to have been made outside of CT and no tax is due. If the supplier is located in CT, or the delivery is made in the supplier's trucks, then the drop shipment rule is applicable. In some instances a consumer's certificate can be passed through.

If a certificate is required, the issuer must be registered in CT. Since the supplier does not generally have a relationship with the consumer, many suppliers will only deal with registered resellers or end up collecting the tax from the reseller rather than the consumer. If a certificate is required the issuer must be registered in CT. The tax basis is the price to the consumer if known or the wholesale price if not.

Florida - Florida looks at where the inventory is located at the beginning of a transaction.  If it is located outside of Florida, even though the supplier has nexus in Florida, then Florida does not recognize this as a Florida-sourced sale and no tax is due. Florida still recommends that a resale certificate be collected on this transaction to document the sale as a sale for resale, however the certificate does not have to be the Florida certificate.

But, if the inventory was located inside of FL at the beginning of the transaction, Florida considers this a FL sourced sale and the reseller must provide a valid Florida certificate or the supplier must collect the sales tax. FL certificates expire annually and you must be registered in FL to have one.

Some companies who have inventory within and outside of FL, will only accept a valid FL certificate in order to simplify their exemption certificate collection process.

Hawaii - Hawaii is truly different than all the other states as their General Excise Tax (GET) is an obligation of the seller, which the seller can pass through to the purchaser if they so choose. While this by itself does not make HI unique, the fact that HI generally sees this as a contractual issue between the the seller and purchaser, and the acceptance of a certificate, even a valid HI certificate, does not absolve the seller from having to collect a tax.

If the supplier decides to pass the tax along, and most do, then the reseller must pay the 4% GET. The only way to avoid paying the 4% GET is by registering in HI. However, this does not absolve you from paying the tax, it only allows you to pay at the reduced wholesale rate of 0.5%.

Louisiana - Louisiana repealed their advance sales tax effective January 1, 2009. There are letter ruling’s prior to that time that generally follow the situation in Florida. If the inventory is outside the state at the time of the transaction it is not a LA sale and if it is in state it is a LA sale. We do not see where LA has provided any guidance since then. We advise our clients to collect a valid certificate or the tax if the inventory started in LA at the beginning of the transaction. A valid certificate is one where the issuer is registered in LA.

As in Florida, some companies who have inventory within and outside of LA, will only accept a valid LA certificate in order to simplify their exemption certificate collection process.

Whether you are a supplier or a reseller, it is most important to pay extra attention to these four states. Since these states are very restrictive in many situations, as a supplier you want to make sure you are collecting a valid certificate or the tax when necessary. As a reseller, if you are being charged tax by your suppliers and the dollar amount is material, you may want to explore getting registered voluntarily. This way the tax comes out of your customers pocket rather than your pocket.

Coming up - In our next post we will discuss IL, NY, PA, and TX.

BTW - If you have any questions or comments please feel free to submit below - or reach out to me directly using the contact options on my Firm Profile Page.

Questions or Comments? While Michael Fleming is no longer with Peisner Johnson & Company, you are welcome to submit business sales tax questions or comments using the COMMENT feature which follows each post. Alternately, you may send questions or consultation requests directly to Peisner Johnson & Company’s founder (Andrew Johnson) using the orange “Request a Consultation” link on linked FIRM PROFILE page.

Other recent “Exemption Certificate Mgmt.” posts by Michael J. Fleming:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.


5 Responses to Drop Ship Exemption Certificates: Four More Restrictive States

  • Posted by Jonathan on March 21, 2018 11:46am:

    Hi Michael,

    can you please let me know the sources for your info regarding the Florida Exceptions? we have called the DOR regarding this and they have told us that if we have nexus, even if the goods originate outside of FL, we are required to charge tax or gather an FL reseller certificate (out of state will not work according to them)

    thank you,

    • Posted by mikefleming on March 21, 2018 12:31pm:

      Hi Jonathan,

      The state would be correct if you are located in FL. However, calling a state is generally not a good idea to base tax decisions. Some state's have well trained staff and others not so much. Sometimes all the facts are not explained fully and a state's oral guidance is generally not a defense in audit.

      Having said that, the answer to your question can be found in Technical Assistance Advisement, No. 09A-010, Florida Department of Revenue, March 2, 2009, released April 2009.

      Here is an excerpt:

      When a registered Florida dealer located outside this state (i.e., Taxpayer) sells tangible personal property to an unregistered dealer located outside Florida (i.e., Buyer 1 or Buyer 2), and the unregistered dealer instructs the registered dealer to ship the property to the unregistered dealer's Florida customer, the sales transaction will not qualify as a taxable Florida sale unless one of the following conditions is met:

      1) Taxpayer ships the property to the Florida customer from Taxpayer's facility in Florida;

      2)Taxpayer ships the property to the Florida customer from Taxpayer's facility located outside Florida, but uses transportation owned or leased by Taxpayer; or

      3)Taxpayer ships the property to the Florida customer from Taxpayer's facility located outside Florida, but the terms of the delivery require Taxpayer to collect the sales price, in whole or in part, from the Florida customer at the time of delivery of the property to the customer.

  • Posted by Wezen on September 26, 2017 4:25pm:

    Hi Michael,

    Thank you for the great article. I have a question. Let's say, I (as a reseller, that has no nexus in any of the 4 states) chooses not to register with any of the 4 states, and pay sales tax to my suppliers, and then I mark up "X" % (equivalent to the "would be" sales tax amount) on top of my final selling price to my end customer so that I don't make any losses due to paying the sales tax to my supplier, would this not be a good solution? On the other hand, if I register with these 4 states to get reseller/exemption certificates, I will be obliged to comply, collect and remit those taxes, in which my end customers will still be paying sales tax to me (which they cannot claim back from the states). So, if the said amount of "mark up" = "sales tax charged to end customer" in the 2 scenarios, as the reseller, I suppose customer will still view both ways the same, because the customer would still pay exactly the same amount in both scenarios (one with the mark up and the other without the mark up but with the sales tax). And therefore, in both scenarios, I will still be equivalently competitive. If this is correct, is there any good reasons as to why I should register with the 4 states? Perhaps, it would make sense if my supplier is located in one of the 4 states, and the ship to state is an out of state end customer (which is in none of the 4 states)?

    • Posted by mikefleming on September 26, 2017 4:39pm:

      Hi Wezen,
      Before I answer your question, there are actually 10 restrictive states. The other 6 are covered in the preceding post.

      As to your comments about your customers paying the same amount, we have found that most customers compare on sales price and not total price. Since the sales tax does not usually show up until you are in the shopping cart, many customers may choose a competitor with a lower sales price. While the amount the customer may pay is equal, the perception for the average customer is that you are more expensive. For the customer who is still looking to avoid paying sales tax, you miss out here also, because you still have a higher price. So my thoughts are that if you have a lot of sales where your vendor want to charge you tax it's best to bite the bullet and get registered. If the sales where your vendor is charging you tax are not numerous, then continue moving forward as you are.

      • Posted by Wezen on October 2, 2017 10:20am:

        Dear Michael,

        Thank you so much for taking your time to reply. Totally get what you meant.

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