Do you buy items online? Do you sell items online? If you answered “yes” then drop shipments probably impact your business. Drop shipments impact almost every business buying or selling goods.
Drop shipments occur when the retailer does not hold inventory and the item is delivered by the supplier. The supplier could be the manufacturer, distributor or another retailer. The customer places an order with retailer who then contracts with supplier to send the goods directly to the customer. The retailer will invoice customer. The retailer needs to understand who has nexus and where the burden to collect sales tax lies.
The easiest way to explain drop shipments is by breaking the model into three scenarios:
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- Scenario 1: Retailer has nexus in the state the customer is located
- Scenario 2: Retailer and supplier do not have nexus in the same state as the customer
- Scenario 3: Supplier has nexus in the customer state and the retailer does not
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Scenario 1: Retailer has nexus in the state the customer is located
- Retailer supplies resale certificate of state where the customer is located to the supplier
- Retailer charges and remits sales tax to the state where the customer is located (including local taxes)
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Scenario 2: Neither retailer or supplier have nexus in the state the customer is located
- Supplier uses common carrier, etc.
- Supplier has no nexus, therefore, no responsibility for sales tax
- Retailer has no nexus, therefore, no responsibility for sales tax
- No resale certificate is required because neither has nexus
- Customer must self-assess use tax
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Scenario 3: Supplier has nexus in the customers state but retailer does not
- Some states may accept resale certificates from other states
- There are 10 states that will not accept out of state resale certificates (CA, FL, IL, LA, MD, MA, MS, TN)
- There is also a Multi-Jurisdictional Exemption but not all states will accept
- Some states hold supplier responsible to collect. CA, CT, FL, and MS are a few of the states that do require supplier to collect sales tax.
- If the sales to a state where the supplier is responsible then the sales tax would be charged to the retailer.
Scenario 3 is complex and is why drop shipments can be difficult to navigate. Drop shipments in this scenario are best addressed on a sale by sale basis. It is important for retailers to understand where the customer and supplier are located. It is also important to ask the supplier in what states they are registered to collect sales tax.
How DHJJ Can Help
DHJJ’s State and Local Tax (SALT) group can help you review your state sales and purchases as well as determine filing requirements. If you have questions about drop shipments, contact DHJJ’s SALT group.
