Drop Shipping: Who’s on the
Hook for Sales Tax?Scott Peterson, VP of U.S. Tax Policy and Government
Affairs, Avalara
3 © Avalara CONFIDENTIAL & PROPRIETARY
Scott PetersonVP of U.S. Tax Policy and Government Affairs
• First Executive Director of the Streamlined Sales Tax Governing Board
• Former COO of an organization devoted to making sales tax simpler and more uniform for the benefit of business
• 10 years as the Director of the South Dakota Sales Tax Division
• 12 years providing research and legal writing for the South Dakota Legislature.
Making sales tax less taxing.4 © Avalara CONFIDENTIAL & PROPRIETARY
Agenda
• Introduction
• What is Drop Shipping for Sales Tax Purposes
• Who collects: Vendors who Use Drop Shippers
or Drop Shippers
• Q&A
Making sales tax less taxing.5 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shopping for Sales Tax Purposes?
• Vendor: The retailer of the item. The “Seller” for Sales
Tax Purposes. aka: Distributor
• Third Party: The provider of the item. The “Drop
Shipper” for Sales Tax Purposes. aka: Manufacturer
• Customer: The final purchaser and user of the item.
“Wants their stuff.”
Making sales tax less taxing.6 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shopping for Sales Tax Purposes?
The Vendor
• accepts an order from a Customer,
• places the order with a Third Party,
• directs the Third Party to deliver the item directly to the
Customer, and
• bills the Customer for the item.
Making sales tax less taxing.7 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shipping for Sales Tax Purposes?
The Third Party
• accepts an order from a Vendor,
• delivers the order to the Customer,
• bills the Vendor for the items delivered.
Making sales tax less taxing.8 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shipping for Sales Tax Purposes?
The Customer
• places an order from a Vendor,
• pays the Vendor,
• receives the item directly from the Third Party.
Making sales tax less taxing.9 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shipping for Sales Tax Purposes?
• The Third Party may deliver the item to the Customer
in its own truck, arrange for delivery by common or
contract carrier, or have the customer pick up the item at
the third party's location.
• The Vendor does not make delivery, only sends the
customer an invoice.
Making sales tax less taxing.10 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shipping for Sales Tax Purposes?
• Vendor: The retailer of the item. The “Seller” for Sales
Tax Purposes.
• Third Party: The provider of the item. The “Drop
Shipper.”
• Customer: The final purchaser and user of the item.
“Wants his stuff.”
Making sales tax less taxing.11 © Avalara CONFIDENTIAL & PROPRIETARY
What is Drop Shipping for Sales Tax Purposes?
For Sales Tax Purposes, a Drop Shipment consists of
two sales:
1. The sale from the Vendor to the Customer.
2. The sale from the Third Party to the Vendor.
Making sales tax less taxing.12 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
• Nexus is the underlying legal issue.
• Nexus describes the contacts you have with a given
state and establishes whether that state can obligate
your company to collect sales taxes.
Making sales tax less taxing.13 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
A simple drop-ship relationship with a Third Party does not
typically trigger nexus for out of state Vendors. The actual
relationships between Third Parties and Vendors are subject to
scrutiny though.
States and the Courts evaluate items like these:
Does a Third Party…
• Store significant inventory on behalf of a Vendor?
• Solicit or advertise on behalf of the Vendor?
• Accept returns or orders on behalf of the Vendor?
• Makes referral to the Vendor?
• Have other customers besides the Vendor?
• Share Ownership with the Vendor?
• Process Orders, Returns or Process Payments to the Vendor?
Making sales tax less taxing.14 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Has nexus in the Customer’s State.
• The Vendor is obligated to collect sales taxes from the
Customer where the vendor concedes nexus (registered
to collect sales taxes).
• The Vendor issues a valid resale certificate to the Third
Party.
• The Third Party exempts the sale to the Vendor based
on a “resellers exemption.”
Making sales tax less taxing.15 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede nexus in the
Customer’s State. The Third Party does not concede
nexus in the Customer’s state.
Neither seller has an obligation to collect in the Customer’s
state. The obligation is on the Customer to remit Use tax
on the retail price.
Making sales tax less taxing.16 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede Nexus in the
Customer’s State. The Third Party concedes Nexus in
the Customer’s State.
• The Vendor is not obligated to collect sales taxes from the Customer
(Vendor is not registered to collect sales taxes).
• The Vendor issues a resale certificate from its own state or an MTC form.
• If the Third Party accepts the certificate, the sale to the Vendor is exempted
based on a “reseller’s exemption.”
• The Customer is obligated to remit Use tax.
Making sales tax less taxing.17 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede Nexus in the
Customer’s State. The Third Party concedes nexus in
the Customer’s state.
• Some states (about 33) allow Third Parties to accept out
of state exemption certificates from Vendors, others
(about 13) do not.
• A challenge lies in those states who do not accept out-of-
state exemption certificates.
Making sales tax less taxing.18 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede Nexus in the
Customer’s State. The Third Party concedes nexus in
the Customer’s state.
• In States where foreign reseller exemption certificates
are accepted, the use tax obligation on the Customer.
Making sales tax less taxing.19 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede Nexus in the
Customer’s State. The Third Party concedes nexus in
the Customer’s state.
• In States where foreign reseller exemption certificates are not
accepted, rules exist to determine the appropriate tax base.
• For example, in CA, a Third Party is required to assess tax on the
sale to the Vendor at 110% of the price charged to the Vendor,
unless the Third Party knows the actual retail price paid by the
customer, then the Third Party must charge tax on the full retail
amount to the Vendor.
Making sales tax less taxing.20 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede Nexus in the
Customer’s State. The Third Party concedes nexus in
the Customer’s state.
In other states, the Third Party is obligated to collect sales taxes on the
actual price paid by the Vendor:
• DC
• Florida
• Louisiana
• Maryland
• Nebraska
• Nevada
• Tennessee
Making sales tax less taxing.21 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
The Vendor Does Not Concede Nexus in the Customer’s State. The Third
Party concedes nexus in the Customer’s state.
• Finally, some states obligate the Third Party to collect sales taxes on
the actual price paid by the Customer.
• California
• Connecticut
• Hawaii
• Massachusetts
• Rhode Island
• Wisconsin
Making sales tax less taxing.22 © Avalara CONFIDENTIAL & PROPRIETARY
Who Collects?
When a Customer has their own Exemption
Certificate, some states who do not allow the
Vendor’s foreign resale certificate will allow the
Third Party to accept a valid exemption certificate
from the final customer.
Making sales tax less taxing.23 © Avalara CONFIDENTIAL & PROPRIETARY
Takeaways:
1. There are Three Parties to a Drop Ship arrangement:
– Vendor
– Third Party
– Customer
2. There are Two Sales in a Drop Shipment:
– The sale from the Third Party to the Vendor
– The sale form the Vendor to the Customer.
Making sales tax less taxing.24 © Avalara CONFIDENTIAL & PROPRIETARY
Takeaways:
3. Use of a Third Party does not alter the obligation to
collect in a state where the Vendor already has nexus.
4. Even when a Vendor lacks nexus in the Customer’s
state, a Third Party with nexus in the customer’s state
may have an obligation to collect.
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