Drop Shipments and Sales Tax

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A Drop Shipments and Sales Tax Navigating Varying State Policies on Registrations and Exemptions WEDNESDAY, MAY 29, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Miles Hutchinson, CPA, President, Sales Tax Advisors, Greater Kansas City Area Steven Dimengo, Partner, Buckingham Doolittle & Burroughs, Akron, Ohio Richard Fry, Attorney, Buckingham Doolittle & Burroughs, Akron, Ohio For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Drop Shipments and Sales Tax Seminar May 29, 2013 Steven Dimengo, Buckingham Doolittle & Burroughs Richard Fry, Buckingham Doolittle & Burroughs Miles Hutchinson, Sales Tax Advisors

6 Today s Program Potential Nexus-Related Difficulties [Steven Dimengo and Richard Fry] Slide 8 Slide 20 Fundamental Drop Shipping Concepts [Miles Hutchinson] Slide 21 Slide 38 Ongoing Compliance Demands From Drop Shipping [Miles Hutchinson, Steven Dimengo and Richard Fry] Slide 39 Slide 59 States That Pose Particular Issues [Steven Dimengo and Richard Fry] Slide 60 Slide 68

7 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

8 Steven Dimengo, Buckingham Doolittle & Burroughs Richard Fry, Buckingham Doolittle & Burroughs POTENTIAL NEXUS-RELATED DIFFICULTIES

9 Background: Drop Shipment Concepts Supplier/wholesaler selling property to retailer but delivers property directly to the retailer s customer on behalf of retailer Vendor s sales/use tax collection requirement: Bright-line physical presence requirement Customer is still liable for use tax if tax is not collected by vendor. The issue: Supplier has a physical presence in the state where the customer is located, but the retailer does not. 9

10 Master Your Nexus Quill Corp. v. North Dakota, 504 U.S. 298 (1992) Due Process Clause requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax. Commerce Clause requires that a state tax (1) be applied to an activity with a substantial nexus with the taxing state, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services provided by the state. De minimis exception: Activities, when taken together, establish only a trivial connection with a state. Quill, at n. 8 (presence of a few floppy diskettes did not give rise to substantial nexus). Wisc. Dept. of Rev. v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). 10

11 What Constitutes A Physical Presence? Physical presence can be established directly or through an agent/representative in the state. Nexus created by independent contractors conducting continuous local solicitation in [the state] and forwarding the resulting orders to the taxpayer. Scripto, Inc. v. Carson, 362 U.S. 207 (1960) Sales representatives/independent contractors in-state activities of calling on customers and soliciting orders constituted continuous physical presence of taxpayer.tyler Pipe Industries, Inc. v. Washington Dep t of Rev., 483 U.S. 232 (1987) 11

12 Common Nexus Issues Voluntary registration: A business registration to do business in a state as a foreign entity may lead to a concession that the business is subject to the state s taxes. Likewise, voluntary registration to collect and remit sales tax likely constitutes a concession that sales tax collection is required. Employee visits: Sporadic employee visits will likely create substantial nexus, even though a taxpayer had no permanent place of business in the state, especially if the employee s presence helps create or maintain the in-state market. Telecommuters: Employee works from home in a state where the taxpayer otherwise does not have a place of business. See, e.g., Telebright Corp., Inc. v. Director, Div. of Tax., No , CCH (N.J. Tax Ct., Mar. 24, 2010) (Maryland business had nexus with New Jersey for corporate business tax by virtue of a telecommuting employee who worked out of her home after husband was relocated to the state). 12

13 Common Nexus Issues (Cont.) Trade show presence Many states have specific exemptions for the attendance of trade shows, with some being qualified by the number of days attending the trade show and whether orders are taken at the trade show. Other states, Texas for example, have taken a more aggressive position that nearly any presence at a trade show where products are sold, orders are taken or promotion for future sales are made creates nexus. State-specific standard 13

14 In-State Representative Activities General rule: Substantial nexus will be present if (1) a representative relationship is exists (regardless of contractual designation), and (2) the representative performs in-state activities on the taxpayer s behalf that help create or maintain the taxpayer s market. Deliveries or installations: Nexus is present if a business delivers property to customers in the state using its own trucks. Delivery via common carrier or U.S. mail is excluded. Warranty repairs and service work: Generally will create nexus, even if performed by an independent contractor or representative Dell cases: Contractually, Dell was the agent and the warranty provider was the principal. Dell argued that a principal s presence cannot be attributed to its agent to create nexus. But, a substantial presence was found due to Dell s control over the service provider. The customer was first obligated to contact Dell for overthe-phone technical support. Dell determined whether an issue was covered by the warranty, and the service provider s presence was significantly associated with Dell s ability to create and maintain a market in the state. See Dell Catalog Sales, LP v. New Mexico, 199 P.3d 863, (N.M. App., 2008); State v. Dell Int l, Inc., 922 So.2d 1257 (La.App., 2006); and Dell Catalog Sales, LP v. Comm r of Rev. Serv., 834 A.2d 812 (Conn. Sup., 2003) (failed to find substantial nexus due to lack of evidence concerning extent and frequency of warranty provider s presence, despite finding that Dell receives significant benefit from provider) 14

15 Click-Through Nexus 11 states have click-through nexus statutes or administrative policies. Generally, nexus is presumed to exist if: Agreement with in-state affiliates To refer sales, including via Web link In exchange for a commission or other consideration, and Sales from such referrals is more than $10,000 per year. NY statute recently upheld amid facial constitutional challenge. Overstock.com, Inc. v. N.Y. St. Dept. of Tax and Fin., 2013 WL (N.Y. Ct. of Apps., Mar. 28, 2013) Limited to compensation paid based upon completed sales; recognized mere advertising insufficient to create nexus. N.Y. St. Dept. of Tax and Fin. Memorandum No. TSB-M-08(3)S (May 8, 2008) California has Google exception. Cal. Rev. & Tax. Code 6203(c)(5)(B) & (C) 15

16 Affiliate Nexus Deems nexus to exist if a related entity with an in-state physical presence: Sells the same or substantially similar products under the same or a substantially similar name Has facilities or employees in the state which advertises, promotes or facilitates sales for the out-of-state seller, or helps establish or maintain an in-state marketplace (such as receiving or exchanging returned merchandise) Has an in-state distribution center, warehouse or similar location that delivers products sold by the out-of-state seller 16

17 Drop Shipments Physical presence? In-state representative fulfilling orders on behalf of out-of-state seller? Presence of in-state property (inventory)? In 2013 BNA Survey of State Tax Departments, 15 states indicated that the use of a drop shipper would create nexus when the drop shipper and customer are in the same state. Is nexus created even if the customer and drop shipper are not in the same state? No state has made such a finding (except Missouri via administrative regulation, which is discussed later). 17

18 Web-Based Nexus Owns or leases in-state server Shared use of third party s in-state server Pays a Web-hosting provider with an in-state server 18

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20 Trailing Nexus In 2013 BNA Survey of State Tax Departments, 35 states responded that they would find nexus to exist for the entire taxable year during which nexus-creating activities ceased (but no longer). Only IN responded that trailing nexus may extend beyond the taxable year. One year seems reasonable to me as a benchmark for states without specific guidance, but a state may have unique consideration that dictate a different policy. - Thomas Shimkin, director of the Multistate Tax Commissioner s nexus program 20

21 Miles Hutchinson, Sales Tax Advisors FUNDAMENTAL DROP SHIPPING CONCEPTS

22 About Miles Hutchinson Miles Hutchinson is a seasoned veteran of finance, accounting and tax law with over 35 years experience including roles from financial auditor at PricewaterhouseCoopers to CFO of a billion dollar real estate development company. He writes and speaks for many of the national and international seminar companies and is recognized as an expert in payroll and sales & use tax as well as financial modeling & analysis tools, business strategy and communications. Mr. Hutchinson holds a CPA accreditation and is the author of several useful accounting and tax tools available at and Please visit his web sites to see how you can further benefit from his expertise. Sales Tax Advisors, Inc. 22

23 Fundamental Drop Shipping Concepts The drop shipment transaction Problematic scenarios and issues to anticipate Case examples California New York Sales Tax Advisors, Inc. 23

24 Interstate Vs. Intrastate Interstate buyer and seller are in different states; goods are delivered across a state line. Sourcing rules - depends on the rules of the shipping state re: Title transfer Shipping point Destination Intrastate goods are delivered within the same state from which they were shipped Sourcing rules - depends on the rules of the state re: Title transfer Shipping point Destination Sales Tax Advisors, Inc. 24

25 Nexus nex us (nkss) n. pl. nexus or nex us es 1. A means of connection; a link or tie 2. A connected series or group 3. The core or center Sales Tax Advisors, Inc. 25

26 Nexus (Cont.) Many states require out-of-state sellers to register to collect sales and use tax if they engage in activities within the state such that nexus is created. Sellers should check state statutes for nexus requirements before doing business in or registering in a foreign state. Sales Tax Advisors, Inc. 26

27 Determining Nexus Download a copy of state s nexus questionnaire Review state definitions for authority to tax Contact Sales Tax Advisors, Inc., Sales Tax Advisors, Inc. 27

28 Interstate Commerce Exemption U.S. Constitution Commerce Clause of the ICE States will not tax goods moving in interstate commerce no border taxes. If property comes to rest, it may become subject to that state s power to impose a tax. Sales Tax Advisors, Inc. 28

29 The Drop Shipment Transaction V2 Manufacturer/ Distributor V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax in Invoice 1. Sales Tax Advisors, Inc. 29

30 Order 1 The Drop Shipment Transaction (Cont.) V2 Manufacturer/ Distributor V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax in Invoice 1. Sales Tax Advisors, Inc. 30

31 Order 1 The Drop Shipment Transaction (Cont.) V2 Manufacturer/ Distributor Exempt Order 2 V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax in Invoice 1. Sales Tax Advisors, Inc. 31

32 Order 1 The Drop Shipment Transaction (Cont.) V2 Manufacturer/ Distributor Exempt Order 2 V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax in Invoice 1. Sales Tax Advisors, Inc. 32

33 Order 1 The Drop Shipment Transaction (Cont.) V2 Manufacturer/ Distributor Exempt Order 2 Invoice 1 V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax in Invoice 1. Sales Tax Advisors, Inc. 33

34 Invoice 2 Order 1 The Drop Shipment Transaction (Cont.) V2 Manufacturer/ Distributor Exempt Order 2 Invoice 1 V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax in Invoice 1. Sales Tax Advisors, Inc. 34

35 Invoice 2 Order 1 The Drop Shipment Transaction (Cont.) V2 Manufacturer/ Distributor Exempt Order 2 Invoice 1 V1 Retailer Customer Key conditions: V1 does not have nexus in the customer s state. V2 does have nexus in the customer s state. V2 requires proper exemption certification to avoid charging tax. Sales Tax Advisors, Inc. 35

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37 California Drop Shipments CA requires retailer to register in CA to protect drop shippers from sales tax liability. Retailer must issue CA resale exemption certificate to drop shipper with a CA STID number. Retailers may not use exemption certificates from other states; they will not protect CA drop shippers. Retailers must collect and remit sales tax. Sales Tax Advisors, Inc. 37

38 New York Drop Shipments Retailer may issue a New York state certificate with a home state registration number. Drop shipper may accept this documentation to avoid tax on NY deliveries. Retailer is not required to collect sales tax. Sales Tax Advisors, Inc. 38

39 Miles Hutchinson, Sales Tax Advisors Steven Dimengo, Buckingham Doolittle & Burroughs Richard Fry, Buckingham Doolittle & Burroughs ONGOING COMPLIANCE DEMANDS FROM DROP SHIPPING

40 Consequences Of Non-Compliance If your company has drop shipper issues and does not know the rules in each state where goods are delivered, the consequences could be expensive. Drop shippers may begin charging you sales tax. Retailers see their profit margins erode. Penalties (and interest) for failure to: Register File tax returns Remit taxes No statute of limitations on retroactive application of penalties Sales Tax Advisors, Inc. 40

41 Dealing With Non-Compliance Consider using a liaison to mediate correction of the problem Protect the company from discovery until a settlement is reached Determine whether amnesty is currently offered by the offended state Negotiate states often consent to drop the penalties with those who volunteer to comply Interest is seldom negotiated. Sales Tax Advisors, Inc. 41

42 Manage Your Tax Exposure Obtain a matrix of the state-by-state rules Follow each state s requirements for documenting resale exemptions on your drop shipments Provide this documentation to the drop shippers to maintain your resale exemption and protect them from tax assessment during audits Remember, some states have time limits on their certificates anywhere from two to 10 years Be sure to renew your exemption certificates before they expire Refer to: for additional information and a matrix Several third-party vendors supply software (often Web-based) to help manage your exemption certificates. Sales Tax Advisors, Inc. 42

43 Buying From Wholesalers Wholesalers may not be aware of the sales tax risks associated with drop shipping. Get ahead of this issue Inform your drop shippers of the need for proper documentation Provide the correct documentation whether asked or not Maintain a tickler file of expiration dates for certificates you have issued, and renew early Sales Tax Advisors, Inc. 43

44 Streamlined Sales Tax Project Increase in Internet and catalog purchases Web-based businesses States are losing tax dollars. Main Street Fairness Act Standardization of definitions Amnesty Member and associate states Sales Tax Advisors, Inc. 44

45 Streamlined States Sales Tax Advisors, Inc. 45

46 Sales And Use Tax Resources State Web sites free CPA tools IRS toolbar state sites list Professional associations R.I.A. CheckPoint online research Sales Tax Advisors, Inc. Sales Tax Advisors, Inc. 46

47 Audit Issues From Different Perspectives Drop shipper/wholesaler: Were exemption certificates maintained properly? If collection is required, upon what price must tax be collected? Seller/retailer: What is in-state presence? Does presence through drop shipper inventory and/or in-state representative fulfilling orders create nexus? Information collection: Seller may have been flagged due to relationship with drop shipper. Customer: Was tax charged on taxable purchases? Avoid double-taxation (e.g., if drop shipper charged tax, and customer self-accrued tax) 47

48 Preparing For An Audit Document retention - resale/exemption certificates Does the state accept a resale/exemption certificate without an instate registration number? Will acceptance of an out-of-state certificate relieve the drop shipper of its collection obligation? Does the state accept multi-jurisdictional certificates? 48

49 Preserving Exemption Certificates Easiest to store electronically in central location Periodically examine certificates for: Completeness Validity Timeliness 49

50 Invoices Retailer (not drop shipper) should invoice the customer. It is best if retailer s invoice does not indicate from where goods were shipped. Otherwise, it appears as though the retailer had inventory present in the state. 50

51 Audits Majority allows manufacturer/wholesaler to accept multi-jurisdiction or home state resale certificate. SSUTA requires member states to accept a resale certificate or other evidence, even if the seller is not registered to collect sales or use tax in the state where the sale occurs. 24 full member states Approximately 36 states follow these procedures. 51

52 Electronic Storage Exemption certificates may be stored in paper or electronic form. If one is accepted in electronic form, no signature is required. 52

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54 Timing Of Acceptance If accepted at the time of sale or within 90 days thereafter, the seller is relieved of collection obligation. 120-day rule: If an exemption certificate is not so obtained, the seller may obtain a fully completed exemption certificate within 120 days of the state taxing authority s request for substantiation of exempt sales. 54

55 Good Faith Acceptance Means that the claimed exemption is: Statutorily available on the date of the transaction in the jurisdiction where the transaction is sourced, Applicable to the item being purchased, and Reasonable for the purchaser s type of business. Good faith standard does not apply when accepted within 90 days of the sale. However, a state need not accept a fraudulently obtained certificate. 55

56 Other Evidence Other evidence of an actual exempt use/purpose may be presented. Seller will have burden of proof to establish exemption. E.g., statement or letter of usage from customer 56

57 Non-SSUTA Members Non-member states may have more onerous requirements to establish exemption. Some states only allow an exemption if the purchaser is issued a statespecific registration or certificate. For example, Florida requires a purchaser to obtain an annual resale certificate to claim exemption. Majority allows an exemption to be substantiated by other evidence of exempt use/purpose, such as a customer statement. But, the seller will likely have the burden of proof. 57

58 Additional Considerations To Support Non-Taxability Of Sale Supplier delivered property from outside the taxing state. Customer has a direct pay permit. Customer paid the tax. Customer is entitled to an exemption as supported by obtaining a timely exemption certificate. Resale exemption Status exemption (e.g., government entity or non-profit organization) Use exemption (e.g., manufacturing equipment) Preserve all exemption certificates indefinitely, since potentially no statute of limitations due to failure to file sales tax returns 58

59 Dealing With Auditors You may need to educate the auditor, as states with recent law changes may not have taken the time to retrain their auditors. Explain compliance procedures to help establish reasonable cause, if delinquency exists to avoid penalties Only provide information that is requested 59

60 Steven Dimengo, Buckingham Doolittle & Burroughs Richard Fry, Buckingham Doolittle & Burroughs STATES THAT POSE PARTICULAR ISSUES

61 SSUTA Drop Shipment Treatment SSUTA requires each member state to allow a third party vendor (e.g., drop shipper) to claim a resale exemption based on an exemption certificate provided by its customer/re-seller or any other acceptable information available to the third party vendor evidencing qualification for a resale exemption, regardless of whether the customer/re-seller is registered to collect sales and use tax in the state where the sale is sourced. Sect. 317(A)(8) 61

62 Problematic Treatment Certain states place the sales tax collection burden on a drop shipper with nexus. Assuming retailer does not have nexus and is not registered to collect sales tax Avoids dispute over nexus Collection may be based upon: (1) wholesale price, or (2) retail price or wholesale price plus mark-up. Drop shipper is unlikely to know the retail price. 62

63 Florida If a drop shipper fulfills an order from Florida and ships to a Florida address, the drop shipper must collect tax. If a Florida manufacturer sells taxable merchandise to an unregistered out-of-state dealer, who, being unregistered dealer, but delivers it to the out-of-state dealer s customer in Florida, he shall collect tax from the out-of-state dealer, who, being unregistered, is unable to furnish a resale certificate. Fla. Admin. Code 12A (10) If a drop shipper ships from outside Florida and uses a common carrier, drop shipper may accept a multi-jurisdictional or home state exemption certificate. 63

64 Missouri Deems retailer to have nexus based upon temporary ownership of instate property Takes the position that title passes from the drop shipper to the retailer just prior to delivery to the consumer Is presence de minimis? Drop shipper does not have an obligation to collect tax, because the retailer has nexus. 12 Mo. Code of State Regulations (4)(F) 64

65 Tennessee Drop shipper must collect tax on behalf of retailer. [Sales of tangible personal property or taxable services made by a dealer to an out-of-state vendor who directs the dealer act as his (the out-of-state vendor) agent to deliver or ship tangible personal property or taxable services to his (the out-of-state vendor) customer, who is a user or consumer, are subject to Sales or Use Tax. The dealer so acting as agent for the out-of-state vendor must collect the tax involved on the transaction Tenn. Comp. R. & Regs Drop shipper cannot rely upon a consumer s exempt status to claim exemption. [T]he taxable event occurs at the time an item is sold by the [drop shipper to the retailer]; subsequent transactions will have no effect on the taxability of the [drop shipper] s sale. Tenn. Dep t of Rev. Letter Ruling (Nov. 21, 2011) Is this consistent with the above-quoted regulation? 65

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67 Trending More states are moving toward the majority of allowing a drop shipper to accept a multi-jurisdiction or home state resale certificate, or other evidence of actual exempt use, even if not registered with the state where property is delivered. Thanks to SSUTA and MTC Nevada, Wisconsin and West Virginia recently changed position on drop shipments. Does this mean more pressure will be placed on retailer? 67

68 Summary Thoughts Supplier/drop shipper Always obtain properly completed resale exemption certificate from retailer (even if not registered in destination state) Problem/minority states, either: Obtain customer exemption certificate (through retailer), or Collect tax from retailer If audited evidence customer paid tax (or direct pay permit) Retailer Don t use drop shipper in customer state (unless prepared to incorporate tax as part of doing business and/or increase price of goods to cover such cost) 68