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presentsDrop Shipments and Sales TaxN i tiNavigatingVaryingVi StateSt t PoliciesP li i on RegistrationsR i t tiandd ExemptionsEtiA Live 110-Minute Teleconference/Webinar with Interactive Q&AToday's panel features:David Olivier, Founder and Managing Principal, Olivier & Associates, New YorkSilvia Aguirre, President, Tax Technology Services, Raleigh, N.C.Michael Keefe, Sales and Use Tax Supervisor, United Technologies Corp., Farmington, Conn.Wednesday, June 23, 2010The conference begins at:1 pm Eastern12 pm Central11 am Mountain10 am PacificYou can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.
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Drop Shipments And Sales TaxWebinarJune 23, 2010Dan Davis, Assoc. Sales Tax Consultantsddavis@astc.comSilvia Aguirre, Tax Technology Servicessaguirre@ttsllc.comMichael Keefe, United Technologiesmichael.keefe@utc.comDavid Olivier, Olivier & Associatesdolivier@oatax.com
Today’s ProgramFundamental Drop Shipping Issues(Dan Davis)Slides 6-11Specific Drop Shipping IssuesSlides 12-29(Silvia Aguirre)Compliance From Taxpayer’s PerspectiveSlides 30-37(Michael Keefe)R lRelevantt StStatet CaseCLawLSlid 38-39Slides38 39(David Olivier)Ongoingg g CompliancepDemandsSlides 40-47(David Olivier)5
Fundamental DropShi i IssuesShippingIDan Davis, Associated Sales Tax Consultants
What Is A Drop Shipment?Sale where merchandise is not already in retailerretailer’ss inventoryInvolves three parties: Retailer, retailer’s vendor/supplier, andcustomerDrop shipmentSubset of above transaction type, wherein vendor ships themerchandise directly to customer7
Possible Scenarios1.2.3.44.5.All three parties are situated in same stateParties are in different states; retailer and supplier/drop shipper bothhave nexus in destination stateParties are in different states; retailer has nexus in destination statebut supplier does notParties are in different states; neither retailer nor supplier has nexus indestination stateThe problem scenario: The drop shipper has nexus, but theretailer does not8
Who Owes Tax In The Problem Scenario? The logical answer States that take the logical approach The other, less logical, states Wh t if theWhatth customertwillill resellll theth merchandiseh di or hash exemptt status?t t ?9
Through The Looking Glass – TheDrop Shipper’s DilemmaThe drop shipper as tax collectorFrom whom does the shipper collect?What is the measure of the tax? Is it wholesale, retail or something else?ow iss thee “retaile a sesellingg pprice”ce determined?de eed?How10
Questions To Be Considered Is the drop shipper registered in the destination state? Is the retailer registered in the destination state? If the problem scenario applies, what is the destination state’s policyregardingdi dropdshipments?hit? Is the sale to the customer exempt, and if so, how will the exemptionbe documented?11
Specific Drop ShippingIssuesSilvia Aguirre, Tax Technology Services
Drop ShipmentWhen a supplier accepts an order from a seller, and thesupplier delivers the goods to the customer on behalf of theseller in a state where the supplier has nexusFor purposes of above definition:Supplier – Manufacturer/originator of goodsSeller – Wholesaler/distributor (middleman)between supplier and customerCustomer – End user13
Drop Shipment – Different ViewsCommon player thoughts regarding drop shipmentsCustomer: “If I buy it from an out-of-state wholesaler, I do not owe taxes.”g purchased reallyy tax-exempt?Concern: Are the items beingSeller/Buyer: “Why am I being taxed? I am reselling, and the supplier andcustomer are in another state. This is unconstitutional!”Concerns: Are you comfortable with your nexus exposure analysis? Do youreally only operate in one state?Do you understand your customer’s use of the items being sold?Should you?What do you know about your supplier? Are you applying thecustomer’s point of view?14
Drop Shipment – Different Views (Cont.)Common player thoughts regarding drop shipments (Cont.)Supplier: “Why is the buyer short paying the tax? Don’t theyunderstand?”Concern: Do you have policies in place for your customer carepersonnel, tax department, or credit departments to addressthe concerns of the buyer?yDo you know which certificates to accept?Can you contact your buyer’s customer for information?15
Drop Shipment Considerations Some states assume items are for resale, and the seller/buyercertificate is sufficientsufficient. Some states require the customer’s exemption be included with theseller/buyer certificate to prove resale. SSome statest t wantt you tot retaint i shippinghi i informationi fti tot prove outtof-state origination. Some states tax the sales based on the seller’s price, others basedon the supplier’s price.16
Drop Shipment Common ApproachesSeller/buyer can issue resale certificate to supplierNEXUSSeller ricepSupplierResale certificate17
Drop Shipment Common Approaches (Cont.)States that fall under this categoryAlabamaArizonaColoradoGeorgiaIdahoIllinois MissouriNebraskaNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioPennsylvaniaRh d IslandRhodeI l dSouth CarolinaSouth evada as of 10/1/2007Wisconsin as of 10/1/2009West Virginia as of 12/31/2007** Illinois – A resale number can beobtained without establishing nexus,and/or a written statement that buyerhas no nexus should be code/086/086001300B02250R.html
Drop Shipment Less Common ApproachesPass-through: Customer could issue resale/exemption certificateto supplier via sellerNEXUSResale/exemption certificateSeller priceSeller/BuyerOrderCustomerDeliverySupplier priceSupplierResale certificate Customer certificate19
Drop Shipment Pass-ThroughStates that fall under this eNevada prior to 10/1/2007*Wisconsin prior to 10/1/2009 *If no certificate is received, tax will be calculated accordinglySeller priceCalifornia 10% markup ofsupplier price!MassachusettsWisconsin prior to 10/1/2009 *Supplier priceMississippiTennessee (seller considered an agent)Nevada prior to 10/1/2007 ** Nevada note - http://tax.state.nv.us/documents/27026 TAX%20NOTES.pdf* Wisconsin note - 0
Drop Shipment – First On Board Sale occurred outside the nexus state Inventory shipped from outside the state Supplier can accept seller certificateNEXUSSeller iverySupplier priceSupplierResale certificate21
Drop Shipment – First On Board (Cont.)States that fall under this categorySeller’s certificate of exemption can be acceptedConnecticutFloridaLouisianaWest Virginia prior to 12/31/2007**Arkansas **Oklahoma **** West Virginia note – West Virginia became a full member of SST 10/1/05. The regulations changed 12/31/07to accept the drop shipment rules from hap 11&art 15B#15Bpgp** Arkansas note – Arkansas became a full member of SST 1/1/08; the regulations are conflicting. In SST,Arkansas should accept the resale certificate regardless of FOB, but the regulations still state thatdocumentation should be retained to prove ions pdfs/register/nov-dec 06/006.05.06-005.pdf** Oklahoma note – Oklahoma became a full member of SST 10/1/05; the regulations are conflicting. In SST,Oklahoma should accept the resale certificate regardless of FOB, but the regulations were just amended inFebruary 2010 to include the language. http://www.oar.state.ok.us/register/Volume-27 Issue-10.htm#a3097822
Drop Shipment TaxableTaxable transactionNEXUSSeller ricepSupplierTax due to supplier23
Drop Shipment Taxable (Cont.)States that fall under this categoryDistrict of ColumbiaHawaiiMaryland Maryland - taxtips/business/bustip04.asp Hawaii – ET.pdf District of Columbia te db 1000869&findtype VQ&fn %5Ftop&ifm NotSet&pbc 4BF3FCBE&rlt CLID%5FFQRLT8063617416166&rp %2FSearch%2Fdefault%2Ewl&rs WEBL10%2E06&service Find&spa DCC%2D1000&sr TC&vr 2%2E024
SST Drop Ship RuleSect. 317: Administration Of ExemptionsA Each member state shall observe the following provisions when a purchaserA.claims an exemption:8. In the case of drop shipment sales, member states must allow a third partyvendor (e.g., drop shipper) to claim a resale exemption based on anexemption certificate provided by its customer/re-seller or any otheracceptable information available to the third party vendor evidencingqualification for a resale exemptionexemption, regardless of whether the customer/recustomer/reseller is registered to collect and remit sales and use tax in the state wherethe sale is sourced.25
SST And Drop ShipmentsSST full nnesotaN b kNebraskaNevadaNew JerseyNorth CarolinaNorth DakotaOklahomaRhode IslandSouth DakotaVermontWashingtonWisconsinWest VirginiaWyoming26
State Sales Tax Audits - General States are becoming more aggressive in audits. Nexus is being redefined in many states. Keep organized and track expirations Train your staff and keep aware of changing state regulationsregulations. Penalties are increasing.27
Audits - Drop ShipmentDrop shipment audits, from different point of viewCustomer – Use tax: Was tax accrued for the items being purchased fromthe seller if they were taxable?It is very likely that the auditor will not audit the seller if no nexus isestablished Having said thatestablished.that, the auditor will likely try to find out if the sellershould be registered in their state.Seller/buyer – Because the transaction is being scrutinized in two differentinstances, it might flag your company for audit based on evidence that youmight have nexus.Supplier – Sales tax: Exemption certificates were not correctly collectedcollected.Tax was not correctly charged. Do you have shipping documents to prove theitems came from out of state?28
Audits - Drop Shipment - AdvancedDouble taxationIf the customer accrues tax, and the buyer pays tax to the supplier, then thestate has been paid twice for the same itemsitems.This information could be helpful if the customer is being audited, and theitems purchased are determined to be taxable and no accrual was in place.Regulation changesFor example, Wisconsin just passed legislation to comply with StreamlinedSales Tax drop shipment rules. This does not mean you are off the hook; thechanges occurred effective OctOct. 1,1 2009,2009 and the audits cover usually a fourfouryear period. uditors’ educationSSometimes,tiyou kknow mighti ht kknow more ththan theth auditor.ditFFor example,l ththestates that recently joined SST have not spent enough time retraining theiraudit force, and they might be relying on non-SST information.29
Compliance FromTTaxpayer’s’ PPerspectivetiMichael Keefe, United Technologies Corp.
Corporate Organizational StructureUTCState & LocalTax Department31
Standard Work Establish a standard process Provide basic information, such as states that thebusiness is registered in for sales/use tax Explain what a drop shipment is; give some easy-tofollow examples32
Guidance MaterialDrop Shipment TransactionsScenario: Seller sells materials (no installation) to customer ("A") and delivers to customer's customer ("B") via common carrier to state where A is not registered.State of DeliveryAlaskaIf Customer ("A") cannotprovide state's resalecertificate, will staterecognize Customer'sout-of-state icutDelawareDistrict of ColumbiaFloridaIf no, will state acceptship-to customer's ("B")in-state certificate?CommentsCite/AuthorityNot applicable (no state sales/use tax imposed)AlabamaArkansasIf yes, what documentation will stateaccept?Home state resale certificate, MultijurisdictionUniform Certificate, or other documentation ofresaleArizona resale certificate indicating registrationnot required; home state resale certificate, orMultijurisdiction Uniform Certificate isacceptableYes, if FOB originHome state resale certificate, MultijurisdictionAND shipment does notUniform Certificate, SST Exemption Certificateoriginate from ArkansasNoYesYes, if FOB originAND shipment does notoriginate ns/electionspdfs/register/nov-dec 06/006.05.06-005.pdfpdfs/register/nov dec 06/006 05 06 005 pdfYesIf the California company "B" will resell theproducts or is otherwise exempt, seller canexempt sale through receipt of B's validCalifornia certificate. If no exemption applies,tax is due on the retail selling price (pricecharged by A to B), which if unknown can bereputably presumed by regulation to be basedon an assumed 10% mark-up.Cal. Code Regs. § 1706(c)(1);Cal. Code Regs. § 1706(c)(2);Cal. Code Regs. § 1706(d)(1)Home state resale certificate orMultijurisdiction Uniform CertificateSale is deemed to occur outside Connecticutprovided inventory shipped from outsideConnecticut via common carrier.Documentation should be retained to prove nonConnecticut resale, along with buyer's homestate or Multijurisdiction Uniform CertificateThe Dept of Revenue is bound by ConnecticutSupreme Court precedent that Connecticut taxdoes not apply if ownership transfers outsideConnecticut, but is strict in enforcing therequirements.Not applicable (no state sales/use tax imposed)NoNoWith respect to goods drop-shipped into theDistrict by Seller on behalf of "A," the Sellermust collect the D.C. sales or use tax from "A"and report the tax to the District unless "A"provides Seller with a valid D.C. certificate ofresale by the date of sale. "A" cannot use aresale certificate from its home state or "B's"resale or exemption certificate to exempt thesale.D.C. Code Ann. § 47-2010;Letter to CCH, Audit Div. Dept. of Finance andRevenue (Sept. 1990)Sale is deemed to occur outside Floridaprovided inventory shipped from outside FloridaYes, if FOB originvia common carrier and not COD.AND shipment does notDocumentation should be retained to prove nonoriginate from FloridaFlorida resale, along with buyer's home state orMultijurisdiction Uniform Certificate33
TrainingDrop Shipments Drop-Ship Transaction: CSD sells to customer A, but ships the product to B, at customerA’s direction. These are treated like any other transaction when all parties are located in the same state.CSD’s customer would simply have to provide that state’s resale certificate to CSD. However,sales tax problems may arise in these transactions when the sold-to customer is located in adifferent state than the ship-to customer.–Example: Bob’s Furnaces is located in State A. Bob sells a furnace to his customerJohn Smith, who is located in State B. To fulfill the order, Bob purchases the furnacefrom CSD. However, instead of having CSD ship the furnace to Bob in State A, Bobinstructs CSD to ship the furnace directly to John Smith in State B. In essence, CSD’s sale to Bob is simply a sale for resale. However, since thefurnace is being shipped by CSD to State B, and Bob is located in State A, whichstate’s resale certificate does CSD need to collect from Bob?SellerShips(CSD)ProductsThird-Party (Smith)(State B)Drop Shipment Rules (by State)StateRuleOption 1 orOption 2GeorgiaCSD may accept from its customer either a Georgia resalecertificate or its customer’s out-of-state exemption certificate, ifthe customer is not registered in Georgia.Option 1KentuckyIf CSD’s customer is not registered in Kentucky, it can submit aresale certificate in a drop ship transaction if it makes a notationon the face of the certificate to the effect that it is a nonresidentpurchaser who is not required to register in Kentucky.KentuckyOption 1(variation)North CarolinaCSD may accept from its customer either a North Carolinaresale certificate or its customer’s out-of-state exemptioncertificate, if the customer is not registered in North Carolina.Option 1CSD may accept from its customer either a South CarolinaOption 1Drop Shipment Rules Vary from State to StateSellsRe-sellsProductProductGeneralSouth Carolinaor its customer’s out-of-state exemptionRule: Always look to the ship-to state’s rules in aresaledrop certificateshipmentcertificate, if the customer is not registered in South Carolina.transaction to determine which certificate is needed in order to validate not1CSD willmay arise.only accept from its customer a TN resale certificate.charging sales tax. The ship-to state is wherethe tax liabilityTennesseeRetailer (Bob)(State A)Option 2If the customer is not registered in TN, then CSD can accept aTN resale certificate from the ship-to customer, if applicable.VirginiaStates Generally Take One of Two Approaches: Option 13Option #1– CSD may accept from its customer either a Virginia resalecertificate or its customer’s out-of-state exemption certificate, ifthe customer is not registered in Virginia.The ship-to state will allow the seller (CSD) to accept either the customer’scustomer s out-of-stateresale certificate or its own home-state certificate. Application to our example: If State B (the ship-to-state) followed this rule, thenCSD can accept from Bob either: (1) Bob’s State B resale certificate (if he hasone); or (2) Bob’s State A resale certificate.Option #2–The shipship-toto state will only allow its own resale certificate to be accepted by the seller(CSD) from its customer. Application to our example: If State B (the ship-to-state) followed this rule, thenCSD can only accept State B’s resale certificate from Bob. Since Bob is located inState A, he may not be registered in State B, and thus cannot issue a State Aresale certificate. If this is the case, then CSD must charge Bob sales tax on thetransaction (even though it is clearly a resale).234
Certain Scenarios Not Covered In Standard Work/Processes11.CustomerCtwantst your businessb itto drop-shipdhi on itsit behalfb h lf butb t cannott provideid an appropriatei t exemptionticertificate, and refuses to pay sales tax. The ship-to state does not accept out-of-state certificates. No easy answers Honest conveyance of existing law, potential exposure, and/or options to mitigate exposure Remains a business decision2.You are not the supplier but instead the distributor. You are not registered in the state to which you aredirecting the supplier to shipship. The supplier is registered in that statestate, and the state does not accept outout-ofofstate certificates. Options: Pay the sales tax Have items shipped to a different state Register for sales tax in the ship-to state Weigh the pros and cons of each option Make the decision best suited to the business in each particular case35
Technology Improvements/AutomationTransaction taxsoftware(Sabrix)Exemption certificate file feedExempt certsoftware(CertCapture)Tax CaalculationTransaction//Job cationsExemptioncertificatesCustomer file feed36
The opinions and analyses expressed herein do not necessarily reflect thosegCorporationpor anyy affiliate thereof. Anyy suggestionsggof United Technologiescontained herein are general, and do not take into account an individual’sspecific circumstances or applicable governing law, which may vary fromjurisdiction to jurisdiction and be subject to change.No warranty or representation, express or implied, is made by UnitedTechnologies Corporation, nor does United Technologies Corporation acceptany liability with respect to the information and data set forth herein.Distribution hereof does not constitute legal, tax, accounting or otherprofessional adviceadvice. Recipients should consult their professional advisorsprior to acting on the information set forth herein.37
Relevant State Case LawDavid Olivier, Olivier & Associates
1. Constitutional issues- Nexus- State requiring state resale certificates - is thatconstitutional? Double taxation potentialp2. State case law- SteelcaseSt lIInc. v. DiDirector,t Div.Di offTaxation- Successfullyy litigatedgin Conn., NJ and NYOLIVIER & ASSOCIATES LLC39
Ongoing ComplianceDDemandsdDavid Olivier, Olivier & Associates
I.Dealing with multiple states’ documentationrequirementsII. Policy on internal preservation of certificate ccopiesIII. What kind of invoice should be given to theIIIcustomer?IV. Recordkeeping on transactions for the sellerand drop shipperOLIVIER & ASSOCIATES LLC41
A. Resale certificates/exemption certificatesà Does the state allow acceptance of resale certificates torelieve drop shipper of liability?B. In-state vs. out-of-state resale certificatesà Does the state accept out-of-state certificates? California requires in-state certificatesC Multi-stateC.M lti t t andd SST exemptionti certificatestifi tà Blanket certificatesOLIVIER & ASSOCIATES LLC42
A. Maintaining exemption certificates on file Associate specific certificate with sales invoiceB. Examining exemption certificates for validity Received in good faith Timely issued (i.e. 60 to 90 days) Properly completed (all required entries) Corrected (valid if corrected within a reasonable time)OLIVIER & ASSOCIATES LLC43
A. Drop shipper’s invoice to out-of-state sellerB. Drop shipper’s invoice to end consumerC Out-of-stateC.O t f t t seller’sll ’ invoicei i tot endd consumerD Calculating selling priceD.OLIVIER & ASSOCIATES LLC44
pSeller’s pperspectiveState’s certificate Multi-state certificates Blanket certificates Affidavit or letter Drop shippershipper’ss perspectiveKeep and obtain resale certificates Obtain and store any end consumer exemption certificates Keep invoices on file Keep shipping documents on file OLIVIER & ASSOCIATES LLC45
Prevent a problem and avoid the need to fix a problem!!! Ask your most pressing questions in this Q&A session.sessionOLIVIER & ASSOCIATES LLC46
This presentation is NOT intended to be tax advice or specificrecommendations.d i The previous discussion is intended to provide a general overview ofsales and use tax drop shipment issues.issues There are many nuances that canaffect the application of sales and use taxes.Olivier & Associates LLC, is a boutique tax consulting firm that onlyprovides sales, use, and transaction tax advice. Our clients are businessesand fellow professionals.pFOR MORE INFO.Please call or email us withyour questions or comments.OLIVIER & ASSOCIATES LLC47
Jun 23, 2010 · Drop Shipment – Different Views Common player thoughts regarding drop shipments Customer: “If I buy it from an out-of-state wholesaler, I do not owe taxes.” Co
