Sales and Use Tax
Sales Tax Policy
Regulations require every company manage sales tax collections according to where they are registered to do business. The challenge of handling this task on a national level often leads to questions as to why companies handle similar transactions differently. Diagraph MSP is a registered taxpayer in most states, and as a registered taxpayer we adhere to various state laws that require us to collect sales tax. Sales tax is not charged on those transactions that are exempt and supported by appropriate documentation. In an effort to explain one of the most challenging sales– drop shipments – we have created the content below.
Defining Drop Shipments
During a third-party transaction commonly known as a “drop shipment”, a retailer sells goods to a customer, but orders the goods from a supplier, such as a manufacturer. The manufacturer then ships the goods on behalf of the retailer. Basically, the goods are delivered directly to the customer from the manufacturer. In this scenario, the manufacturer bills the retailer and the retailer bills the customer. The state the goods are ultimately delivered to takes jurisdiction over the sale, so the destination state’s tax laws apply.
Drop Shipments from a Sales Tax Perspective
Typically no tax issues arise when the retailer has nexus (nexus is when a non-resident seller creates a substantial, frequent and continuous, physical presence in the state), or is voluntarily registered in the state where the goods are delivered. The retailer is responsible for collecting sales tax on the sale of the item to the customer, unless an exemption applies.
If neither the retailer nor the manufacturer have nexus and are not voluntarily registered in the state where the goods are delivered, no sales tax is required to be collected. The customer is responsible for reporting the sales tax on the purchase directly to the state.
However, tax issues arise when the retailer does not have nexus and is not voluntarily registered in the destination state, but the manufacturer is. This situation frequently occurs with Diagraph MSP and many of our customers. Diagraph MSP has nexus and is registered in most states, so we are required to collect the proper documentation or charge sales tax.
Drop Shipment Sale Documentation Requirements
Diagraph MSP’s corporate sales tax department has reviewed all state sales tax requirements for drop shipments. The rules vary by state and not one tax code explains all states. Diagraph MSP is required by each state to have a resale certificate on file for all retailers claiming an exemption. If a retailer requests us to drop ship product on their behalf and not charge them tax, the retailer must provide acceptable documentation to support the exemption. Acceptable documentation varies by state. Sales tax licenses, seller’s permits, vendor licenses, credit reference sheets, W-9’s, or certificates of registration are not acceptable forms to show evidence of resale.
Six Basic Categories for States Regarding Drop Shipments and document requirements
Category One: States that require their sales tax registration number on a resale certificate. If we are drop shipping to anyone in these states, we are required to collect the destination state’s resale certificate or a properly completed Uniform Multijurisdiction Certificate. Without proper documentation, the retailer will be charged sales tax: District of Columbia, Maryland and Nevada.
Category Two: States that accept the retailer’s home state resale certificate. This is basically a reciprocal agreement. Without this certificate, the retailer will be charged sales tax: Alabama, Arkansas, Colorado, Florida, Iowa, Michigan, Minnesota, Missouri, New Jersey, North Dakota, Texas, West Virginia, and Wyoming.
Category Three: States that accept the retailer’s home state resale certificate or a properly completed Uniform Multijurisdiction Certificate. HOWEVER, we must also obtain the following statement on the certificate (or an attached letter on company letterhead) signed by the retailer that states: “I am a reseller with no nexus in the destination state”. Without proper documentation, the retailer will be charged sales tax: Connecticut*, Georgia, Idaho, Indiana, Kentucky, Maine, Mississippi*, New Mexico, Ohio, Oklahoma, South Carolina, South Dakota, Utah, Vermont, Virginia, and Washington.
*the retailer can provide the customer’s certificate as documentation for exemption in these states
Category Four: States that do not have charge sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Category Five: States that require our customer to fill out specific forms: Arizona, Illinois, Louisiana, New York, North Carolina, Pennsylvania, and Tennessee (see below for documents).
Category Six: States that accept the customer’s exemption certificate as documentation to exempt the sale from tax: California, Connecticut, Hawaii, Kansas, Massachusetts, Mississippi, Nebraska, Rhode Island, and Wisconsin.
Uniform Multijurisdiction Certificate
Pay special attention to the instructions, your home sale registration number listed next to your home state does not mean that every state listed on the certificate will allow this form for proof of resale. The instructions specify by state which registration numbers may be used. Once a valid certificate is on file, it is good for five years unless otherwise stated on customer’s resale certificate.
All forms must be completely filled out; if any information is missing the certificate is invalid.