The rules surrounding U.S. state sales taxes as they apply to drop shipped items are very complex.  Add to the complexity, the fact that drop shipped goods often originate in one state and end up in another state.  These shipments across jurisdictional boundaries can potentially subject the vendor and the shipper to disparate rules in the two states.  The disparity in the rules and the corresponding administrative burden is often most troublesome for manufacturers and distributors who drop ship on behalf of their customer, the vendor.

TECHNICAL INFORMATION

The attached table describes the drop shipment rules pertaining to sales tax obligations for manufacturers and distributors.  These rules apply to sales where the manufacturer or distributor ships goods directly to the end consumer on behalf of the retailer.  Generally, the bill to the end consumer is prepared and sent by the retailer who may or may not have nexus in the destination state. This table is intended as general guidance and is not specific to any industry or class of, manufacturer, retailer or end consumer.  We recommend that you contact us for assistance in understanding these rules.

States that accept reseller’s or other exemption certificates issued by the seller when the seller does not have nexus in the delivery state:

  • Alabama
  • Alaska (County & Borough Taxes)
  • Arizona
  • Arkansas
  • Colorado
  • Florida
  • Georgia
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Michigan
  • Minnesota
  • Nebraska
  • Nevada
  • Mississippi
  • Missouri
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

States that accept their state form with seller’s home state resale number:

  • Kentucky
  • New York
  • Pennsylvania

States that require their own certificate (seller must be registered in the state to complete resale certificate):

  • California
  • Connecticut
  • District of Columbia
  • Hawaii
  • Maryland
  • Massachusetts
  • Mississipp

Not only are the rules surrounding drop shipments and resale certificate requirements, complex, but they also change frequently.  We recommend that you consult with a qualified sales tax professional to ensure that you fully understand your obligations for collecting and remitting sales tax.

Sales tax when the seller is out of state

In the last group of states, an out of state seller cannot provide a reseller’s certificate and the manufacturer/shipper is thus required to collect and remit the sales tax.  The question is does the manufacturer/shipper collect on the price charged to the retailer, or on the price charged to the end consumer?  In California, Connecticut, Hawaii and Massachusetts, the shipper is required to collect on the retail price paid by the end consumer.  This requirement can be problematic if the shipper doesn’t have a copy of the final invoice.  In California, if the shipper knows the retail price, then they charge the tax accordingly.  If the shipper does not know the retail price, they are required to add 10% to the amount they are charging the out-of-state vendor to create the tax base.  The rules are different in each of the states that require local shipper collection.

AG TAX LLP Can Help

If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.

Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.

We can assist with:

  • Canadian Personal and corporate tax returns
  • Cross Border Taxation and Business Planning
  • Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

  • 416-238-5920 (Greater Toronto Area, ON)
  • 604-538-8735 (Greater Vancouver Area, BC)
  • 780-702-2732 (Greater Edmonton Area, AB)

 

Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.