Drop Shipments

Drop-shipping is an issue which impacts virtually any individual or company purchasing goods. While this scenario is very prevalent in e-commerce scenarios, it is becoming increasingly common in many other retail sales environments.

• What are Drop Shipments (aka Drop-Ship)?
• Why Drop-Ship Taxation Gets Complicated:
• Drop-Ship Exemption Documentation Requirements:
• Will Sales Tax Registration Trigger Other Tax Obligations in Ship-to States?
• Drop-Ship Assistance and Other Resources:

What are Drop Shipments (aka Drop-Ship)?

In a drop shipment transaction, the retailer does not hold the inventory that is delivered to the end consumer. Once the order is accepted, the retailer contacts the product supplier/shipper and asks them to ship the goods directly to the retailer's customer - the end consumer. The supplier/shipper will invoice the retailer - and the retailer will invoice the consumer.

Why Drop-Ship Taxation Gets Complicated:

Generally, if a seller has nexus in a state and has registered to collect sales tax, they are required to collect sales tax on all taxable sales delivered into that state. Drop ship transactions differ somewhat in that the purchase by the retailer (from the supplier/shipper) is in effect a purchase for resale - which is normally exempt from sales tax. However, quite often drop ship taxation becomes more complicated, as often the retailer is not registered in the ship-to state but the supplier/shipper is. In such cases, the supplier/shipper is obligated to collect tax from the retailer on the drop ship transaction unless the retailer can provide exemption documentation (deemed acceptable by the ship-to state). If a supplier/shipper is shipping product directly to a state in which they are not registered (and/or do not have nexus), then the supplier/shipper does not have an obligation to collect sales tax for that state. However, it is advisable for the supplier/shipper to still obtain appropriate resale documentation from the retailer for such ship-to states, in case it is later determined that the supplier/shipper did in fact have nexus. Additional complications may be present if the retailer's (end consumer) customer is claiming an exemption. In some cases such an exemption can be "passed through" to the supplier/shipper to claim the exemption.

Drop-Ship Exemption Documentation Requirements:

It is important to note that states vary in their rules regarding the exemption documentation that can be used in order to substantiate a sale for resale in drop shipment situations. Some states have developed alternate documentation rules. Depending on the jurisdiction, acceptable documentation can include home state registration or resale certificates, 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. However there are other states (approximately 11) which require a reseller who is claiming a resale exemption to be registered to collect sales tax in their state. These states require a resale certificate with a registration number (from that state) to be issued in order to document the resale exemption. Once registered, retailers will be able to issue a resale certificate but they will also be required to collect sales/use tax on all taxable sales to customers in these states. Given the varying requirements, it is important that drop-ship retailers (as well as suppliers/shippers) consider the exemption requirements on a state by state basis.

Will Sales Tax Registration Trigger Other Tax Obligations in Ship-to States?

In order to obtain resale exemptions in all states, parties to drop shipment transactions may find it necessary to register in additional states. Some companies worry that this can bring about other tax obligations in those states. Generally, income tax liability is not a concern unless the company meets the nexus thresholds for income tax. If the company definitely does not have any nexus or presence then it is not likely they will be required to file income tax returns. (However, this should be reviewed with your income tax advisor.) That said, states are getting more aggressive in identifying any potential unregistered taxpayer. One method is to compare registrations between not only sales tax and income tax, but all other taxes and state licenses and registrations. For that reason it is imperative that a company does a comprehensive review of its activities prior to registering for any taxes. (This includes related entities.)

Drop-Ship Assistance and Other Resources:

If you require assistance regarding sales tax issues, YETTER is available to provide a broad range of services. Please call Diane Yetter at 312-701-1800 to discuss your requirements. The Sales Tax Institute also offers classes which review sales tax basics - through to advanced issues and best practices.

See the CURRENT list of all Sales Tax Institute Online Courses & Webinars - Including Puerto Rican VAT Reform.

Don't forget about these additional DROP-SHIP resources:

Sales Tax Institute's "News & Tips" (Retail)

Diane Yetter Talks Drop-Ship on You Tube

Please visit the YETTER web page for more information on drop shipments and the tax consequences and to order the CCH book Drop Shipments Taxation, Compliance and Planning written by Diane Yetter.

If you subscribe to CCH IntelliConnect Tax Research, we have also written a publication that is available there. For more information, see Drop Shipments section in Sales Tax Research & Compliance Manager.

Are you a multi-state company with a DROP-SHIP question that we have not yet covered here - or in our Sales Tax Archives (below)? If so - Submit it here.

Sales Tax Questions - Drop Shipments

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Question/Topic	Date	Topics	Industries
If VA dropshipper registers for resale exemption certificate in CA, is there CA income tax exposure?	2014-11-24	Drop Shipments Exemptions - Resale or Other Nexus	E-Commerce / On-Line Sales
If drop ship customer picks up order from vendor, do we charge sales tax? What if vendor performs additional service prior to pick-up?	2014-06-16	Drop Shipments Exemptions - Resale or Other
We do most of our drop-ships from China. Do we need resale certificates for customer's ship-to location in US or is this not necessary if they accept ownership before it leaves China?	2014-03-17	Drop Shipments Exemptions - Resale or Other International Issues	E-Commerce / On-Line Sales Export / Import / International Manufacturer
We have customers in Canada, who sell our products in the US. We are one of their drop-shippers and have nexus in 15 states. Should they be charged sales tax?	2014-03-17	Drop Shipments Exemptions - Resale or Other International Issues	Furniture
I have an Australian ecommerce website for US customers and will drop ship goods within USA - and also use FBA (Fulfilled By Amazon) to store and ship. Do I need to incorporate in USA and register for tax?	2014-03-14	Drop Shipments International Issues Internet Taxation	E-Commerce / On-Line Sales Export / Import / International
We own an eCommerce website and are situated in Canada. Our drop-ship suppliers are all in US and we sell only to US. We do not not charge sales tax. Is this legal?	2014-02-05	Drop Shipments International Issues Nexus	E-Commerce / On-Line Sales Furniture
Our customer the reseller has provided a NY resale certificate. We are doing drop ships for them in various states. Is their NY certificate valid for multiple states?	2013-10-28	Drop Shipments Exemptions - Resale or Other Internet Taxation	E-Commerce / On-Line Sales
I am a Canadian eCommerce seller who drop-ships US products to US customers. Do I need to collect US state's sales tax when my taxes go to the Canada government?	2013-08-05	International Issues Internet Taxation Nexus	E-Commerce / On-Line Sales Export / Import / International
I started an online shop. My drop-shippers required me to obtain a Resale Tax certificate. I thought on-line stores don't charge sales tax? Is this right?	2013-07-10	Drop Shipments Exemptions - Resale or Other Internet Taxation	E-Commerce / On-Line Sales Wholesale or Reseller
We have an office in the state that purchases all supplies for resale but we have the items drop-shipped. What tax rate should we be charging?	2013-07-08	Compliance - Order Sourcing Drop Shipments Taxability of Product or Service	Film Production
We are a FL dealer for a CA company. We have a FL exemption certificate. We have a CA customer who wants item drop-shipped to them in CA. Do we charge sales tax?	2012-08-08	Drop Shipments	Affiliate / Agent / Dealer
We are a TX online business and we only charge tax on TX sales. We received an order from CA - that was to be shipped to TX. Can a CA seller's permit exempt this sale?	2012-03-06	Drop Shipments
I have a NJ resale certificate. I asked to have a taxable item drop shipped to a state where I do not have nexus but drop-shipper does. How can this be managed?	2012-03-05	Drop Shipments
Drop-shippers are charging sales tax on shipments into states where they have nexus and say resale certificates are required in order to stop doing so. Is that correct?	2011-12-28	Drop Shipments	Clothing E-Commerce / On-Line Sales
As sales brokers, we rarely (if ever) physically touch the products we sell. Are transactions of this type subject to sales tax?	2011-12-27	Drop Shipments Exemptions - Resale or Other	Affiliate / Agent / Dealer Equipment Sales / Service Installation / Parts / Repairs
If we drop-ship parts to a machining house in Arizona and our end customer is based in Canada - are they subject to sales tax or need to provide exemption certificate?	2011-12-26	Drop Shipments International Issues	Equipment Sales / Service Manufacturer
Our business does a lot of drop shipments from our vendors. Do we need to apply for resale certificates in states where our drop-shippers are located?	2011-12-05	Drop Shipments	Computers / Technology E-Commerce / On-Line Sales
We are a dealer/reseller located in PA. Can sales tax be charged twice on the same material if it is drop shipped?	2011-10-19	Drop Shipments	Affiliate / Agent / Dealer Equipment Sales / Service
We are being charged sales tax by our vendor on drop-shipments to customers that are exempt if we ship. Can this be right?	2011-08-06	Drop Shipments	Equipment Sales / Service
We are an MA based internet retailer and we drop ship from vendors in CA. Are we eligible for tax exemption on CA sales since the bill-to address is in MA?	2011-05-23	Compliance - Order Sourcing Drop Shipments	Equipment Sales / Service
Our corporate office is in Maine but our warehouse is in MO. Product is received at warehouse or drop-shipped to customer. If we drop ship, are we subject to sales tax?	2011-05-18	Compliance - Order Sourcing Drop Shipments	E-Commerce / On-Line Sales
I am starting an e-commerce website out of a home office and will drop-ship all product. Do I need to get a Sales & Use or Reseller license?	2011-04-15	Drop Shipments Internet Taxation	E-Commerce / On-Line Sales
My CA company drop-ships to a dealer's customer in FL where we do not have nexus. Is their CA resale permit acceptable for all interstate and intrastate sales?	2011-02-07	Drop Shipments	Affiliate / Agent / Dealer E-Commerce / On-Line Sales
We drop ship product into CA for our customer who does not have a CA resale certificate. Are we liable for the sales tax?	2011-01-24	Drop Shipments	E-Commerce / On-Line Sales Manufacturer
We are registered in 2 states. Do we need to file returns in all states to which we (or our vendors)ship - or just those where we are registered?	2011-01-24	Drop Shipments Exemptions - Resale or Other	Equipment Sales / Service Government Contractor / Business
We are located in CO but drop-ship nationwide. Do I need to register in every state? Which forms do I need? .	2010-08-23	Drop Shipments	Equipment Sales / Service Manufacturer
Our equipment sales company drop ships to multiple states. Which states require more than resale certificates?	2010-05-07	Drop Shipments	Equipment Sales / Service Service / Maintenance Agmts
We will drop ship to a foreign location for a CA customer who does not have a resale certificate. Do we have to charge tax?	2010-01-14	Drop Shipments International Issues

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