IPT 2017 Sales Tax Symposium San Antonio, Texas September Drop Shipments

Transcription

1 IPT 2017 Sales Tax Symposium San Antonio, Texas September Drop Shipments

2 Presenters Robert T. Andre International Paper Company, Memphis ; Andrew W. Yates Alston & Bird LLP, Atlanta ; 2

3 What is a drop shipment? When a RETAILER fulfills an order by having a ship directly to the Retailer s CUSTOMER. There are two transactions at issue: 1. The sale from the Supplier to the Retailer. 2. The sale from the Retailer to the Customer. 3

4 Tax Issues in Drop Shipments NEXUS AND COLLECTION SALES FOR RESALE TAX BASE 4

5 NEXUS AND COLLECTION The Due Process Clauses and Commerce Clauses of the U.S. Constitution limit states ability to require a seller to collect sales and use tax. See Quill v. North Dakota, 504 U.S. 298 (1992). The due process standard is low, and any non-isolated drop shipments may provide sufficient economic presence to meet it. 5

6 NEXUS AND COLLECTION Under Quill, the Commerce Clause standard requires substantial presence. This has historically meant physical presence, but states are challenging that. But because of the Commerce Clause, the locations of the Retailer, the Customer, and the Supplier can affect sales tax collection obligations. 6

7 Sale #2 Let s start by looking at Sale #2, the retail sale from the Retailer to the Customer. Basic sales tax theory says that Sale #2 and only Sale #2 should be subject to sales or use tax. Nexus issues complicate this. 7

8 Scenario 1: Not Complicated Retailer has nexus with or is registered in Customer s state. RETAILER Sale #1 Sale #2 CUSTOMER 8 STATE A STATE B (though it doesn t matter) Retailer must collect sales tax from Customer on Sale #2.

9 Scenario 2: Also Not Complicated Neither Retailer nor Supplier has nexus with Customer s state. CUSTOMER Sale #1 RETAILER STATE A NOT STATE A 9 Neither Retailer nor Supplier must collect tax on Sale #2. Customer remits use tax.

10 Scenario 3: Now It s Complicated Retailer does not have nexus and is not registered in Customer s state. Supplier ships from a third state. Supplier has nexus in all three states. CUSTOMER Sale #2 RETAILER Sale #1 STATE A STATE B 10 STATE C

11 Scenario 3 CUSTOMER Sale #2 RETAILER STATE A STATE C Sale #1 STATE B Is the Supplier required to collect sales tax on Sale #2? 11

12 Approach 1: No Collection About 2/3 of the states take the position that the Supplier is not required to collect tax, and the Customer owes use tax. This is because the Supplier is not a party to the only retail sale in the transaction, Sale #2, between the Retailer and the Customer. The Streamlined Sales and Use Tax Agreement takes this approach (Rule 317.2). 12

13 Approach 2: Supplier as Retailer Four states deem the Supplier to be a retailer, requiring the Supplier to collect sales tax on Sale #2. These states are California, Connecticut, Hawaii, and Massachusetts. 13

14 Approach 2: Supplier as Retailer 18 California Code Regs. 1706(d)(1) ABC Co. is not a retailer engaged in business in this state. It contracts to sell tangible personal property to a California consumer. ABC Co. then contracts with XYZ Inc. to purchase the tangible personal property. ABC Co. instructs XYZ Inc. to ship the property directly to the California consumer. XYZ Inc. is a retailer engaged in business in this state. XYZ Inc. is the drop shipper liable for the applicable tax as the retailer. 14

15 Approach 2: Supplier as Retailer 18 California Code Regs. 1706(d)(2) ABC Co. is not a retailer engaged in business in this state. It contracts to sell tangible personal property to a California consumer. ABC Co. then contracts with XYZ Inc. to purchase the tangible personal property. ABC Co. instructs XYZ Inc. to ship the property directly to the California consumer. XYZ Inc. is a retailer engaged in business in California. XYZ Inc. then contracts with Supplies Corp. to purchase the tangible personal property, and instructs Supplies Corp. to ship the property directly to the California consumer. Whether or not Supplies Corp. is a retailer engaged in business in this state, XYZ Inc. is the drop shipper liable for the applicable tax as the retailer. 15

16 Approach 2: Supplier as Retailer 18 California Code Regs. 1706(d)(3) ABC Co. is not a retailer engaged in business in this state. It contracts to sell tangible personal property to a California consumer. ABC Co. then contracts with XYZ Inc. to purchase the tangible personal property. ABC Co. instructs XYZ Inc. to ship the property directly to the California consumer. XYZ Inc. is not a retailer engaged in business in this state. XYZ Inc. then contracts with Supplies Corp. to purchase the tangible personal property, and instructs Supplies Corp. to ship the property directly to the California consumer. Supplies Corp. is a retailer engaged in business in this state. Supplies Corp. is the drop shipper liable for the applicable tax as the retailer. 16

17 Approach 2: Supplier as Retailer Conn. Gen. Stat (a)(3)(A)...The delivery in this state of tangible personal property by an owner or former owner thereof or by a factor, if the delivery is to a consumer pursuant to a retail sale made by a retailer not engaged in business in this state, is a retail sale in this state by the person making the delivery. Such person shall include the retail selling price of the property in such person's gross receipts. 17

18 Approach 2: Supplier as Retailer Mass. Gen. L. ch. 64H, 1....When tangible personal property is physically delivered by an owner, any former owner thereof, a factor, or any agent or representative of said owner, former owner or factor, to the ultimate purchaser residing in or doing business in the commonwealth, or to any person for redelivery to said purchaser, pursuant to a retail sale made by a vendor not engaged in business in the commonwealth, the person making or effectuating the delivery shall be deemed the vendor of that property, the transaction shall be a retail sale in the commonwealth by such person and that person, if engaged in business in the commonwealth

19 Approach 2: Supplier as Retailer Haw. Admin. Rules (f) Example: S, an out-of-state seller of tangible personal property, receives an order over the telephone or through the mail, from H, a Hawaii customer who is the ultimate consumer. W is an out-ofstate wholesaler of tangible personal property. S notifies W of the order and requests that W ship the tangible personal property directly to H in Hawaii. W then ships the tangible personal property for delivery to and acceptance by H in Hawaii

20 Approach 2: Supplier as Retailer Haw. Admin. Rules (f)... If W has nexus with Hawaii and is licensed but S is unlicensed and has no nexus, the sale from W to S does not qualify as a wholesale sale under section 237-4(1), HRS, because S is not a licensed seller for general excise purposes, therefore, W is subject to the general excise tax at the rate of four per cent. W is considered to have imported the tangible personal property for resale at retail and is subject to the use tax at of one-half of one per cent. The general excise tax is not imposed on the sale from S to H because S does not have sufficient nexus with Hawaii. Since W is the importer of the tangible personal property and H is not, H would not be subject to the use tax. 20

21 Approach 3: Tax Sale #1 Instead 21 Some states will not accept a resale certificate from a retailer who is not registered to collect tax. Therefore, the Supplier collects tax on Sale #1 as a retail sale. If a Florida manufacturer sells taxable merchandise to an unregistered out-of-state 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. 1:-1.091(10).

22 Approach 4: Use Agency Theory Under the right conditions, State A may attempt to assert nexus on Retailer because of the acts of Supplier in State A. Consider: Retailer has no nexus in State A; Supplier has no nexus in State B and makes an intrastate delivery of goods to Customer in State A. CUSTOMER Sale #2 RETAILER 22 Delivery STATE A STATE B

23 Approach 4: Use Agency Theory The U.S. Supreme Court has held that the acts of a selling agent can create nexus for a retailer who otherwise has no presence in the state. See Scripto, Inc. v. Carson, 362 U.S. 207 (1960). Also consider the Scholastic Book Club cases, e.g., Scholastic Book Club, Inc. v. Comm r of Rev. Serv., 38 A.2d 1183 (Conn. 2012) 23

24 Approach 4: Use Agency Theory Questions: Is Supplier s delivery by common carrier enough to create agency nexus for Retailer? Is Supplier s delivery in its own vehicles enough? What if the Supplier uses the name of the Retailer when delivering goods in its own vehicles? What if the Supplier accepts returns on behalf or the Retailer? 24

25 SALE FOR RESALE Now let s return to Sale #1. Under standard sales tax theory, Sale #1 is for resale and no tax is due. But interstate transactions can complicate the ability to document the sale for resale. 25

26 Questions about Scenario 3 Where does the sale take place? If Supplier ships from State B, no problem. Retailer is registered and gives Supplier a State B resale certificate. CUSTOMER Sale #2 RETAILER 26 STATE A Delivery Sale #1 STATE B

27 Variations on Scenario 3 If Supplier ships from State C, is this a State C sale? If the Retailer is not registered in State C, can it present a valid resale certificate? CUSTOMER Sale #2 RETAILER Sale #1 27 STATE A STATE C STATE B

28 Out-of-State Resale Certificates SSUTA requires members to accept resale certificates regardless of whether the seller is registered for sales tax. So if State C is an SSUTA state, Retailer can provide exemption documentation to Supplier without registration in State C. Some non-ssuta states take this approach (e.g., Texas).

29 Out-of-State Resale Certificates Some states have exemption certificates specifically for out-of-state vendors (e.g., New York and Louisiana). Some states allow limited out-of-state registration for wholesalers (e.g., Illinois).

30 Out-of-State Resale Certificates Some states do not accept out-of-state resale certificates. So what to do? 1. Retailer registers in State C. But that concedes jurisdiction, creates a filing requirement, and requires Retailer to collect tax in State C if it sells into State C. 2. Supplier collects sales tax on Sale #1. But that creates double taxation. State A will either require Supplier to collect tax or Customer to pay tax on Sale #2.

31 Out-of-State Resale Certificates 3. Don t give a resale certificate, but provide other documentation. For this to work, State C must both reject an out-of-state resale certificate but accept other documentation (i.e., a burdenshifting state). Retailer must convince Supplier that this route is acceptable and may need to indemnify Supplier for any tax, interest, and penalties.

32 Question Can you control by contract where the sale takes place? Can you make the sale look like this so that Retailer can issue a State B resale certificate? Will it work? CUSTOMER Sale #2 RETAILER Sale #1 STATE A STATE B STATE C

33 TAX BASE When the Supplier collects tax in a dropshipment transaction, questions arise about the appropriate tax base. CUSTOMER Sale #2 RETAILER Sale #1 33 STATE A STATE C STATE B

34 TAX BASE When the Supplier is the retailer, what is the base of the tax? All four states that take this approach say that it is the retail price. But what if the Supplier has no idea what the retail price is? That price is negotiated between the Retailer and the Customer. States have some guidance. 34

35 TAX BASE California: Supplier may mark up the price charged Retailer by 10%. 18 Cal. Code Regs. 1706(c)(2). Connecticut: Use price to Customer if known; use price to Retailer if not. Connecticut Policy Statement No. 2013(3), 06/19/2013. (This is a strange answer.) Hawaii: The GET is measured on the Supplier s gross receipts, so there is tax base issue. Massachusetts: No guidance. Is the Supplier required to find out the price to the Customer? 35

36 TAX BASE If the state forces Supplier to collect tax on Sale #1 to Retailer (e.g., Florida), the tax base is the price to Retailer. Essentially, wholesale transaction becomes a retail transaction. 36

37 Location of Sale CUSTOMER Sale #2 RETAILER STATE A STATE C Sale #1 STATE B Are we clear on where these sales take place? Is it: Sale #1, State B & Sale #2, State C? 37

38 Location of Sale Or is it Sale #1, State C & Sale #2, State A? What would make the difference? CUSTOMER Sale #2 Sale #1 RETAILER 38 STATE A STATE C STATE B

39 Location of Sale Is this possible: Both Sale # 1 and Sale #2 are State A? CUSTOMER Sale #2 RETAILER STATE A STATE B 39 STATE C

40 QUESTIONS?? 40