Drop Shipments and Sales Tax Navigating Varying State Policies on Registrations and Exemptions

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 THURSDAY, JUNE 9, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Dan Davis, Partner, Associated Sales Tax Consultants, Sacramento, Calif. Irwin Mittleman, Sales Tax Consultant, Meridian Global Services, New York Vytenis Kirvelaitis, Senior Manager, SALT Group, Grant Thornton, Chicago 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 June 9, 2011 Dan Davis, Associated Sales Tax Consultants Irwin Mittleman, Meridian Global Services Vytenis Kirvelaitis, Grant Thornton 5

6 Today s Program Drop Shipping Fundamentals [Dan Davis] Slide 7 Slide 12 Potential Nexus Issues [Irwin Mittleman] Slide 13 Slide 20 Ongoing Compliance Demands [Vytenis Kirvelaitis] Slide 21 Slide 34 Recent Developments And Problematic States [Irwin Mittleman] Slide 35 Slide 43 6

7 Dan Davis, Associated Sales Tax Consultants DROP SHIPPING FUNDAMENTALS

8 What Is A Drop Shipment? Sale for which merchandise is not already in retailer s inventory Involves three parties: Retailer, retailer s vendor/supplier, and customer Drop shipment Subset of above transaction type, wherein vendor ships the merchandise directly to customer 8

9 Possible Scenarios 1. All three parties are situated in the same state. 2. Parties are in different states; retailer and supplier/drop shipper both have nexus in the destination state. 3. Parties are in different states; retailer has nexus in destination state but the supplier does not. 4. Parties are in different states; neither the retailer nor the supplier has nexus in the destination state. 5. The problem scenario: The drop shipper has nexus, but the retailer does not. 9

10 Who Owes Tax In The Problem Scenario? The logical answer: The customer pays use tax. States that take the logical approach The other, less logical, states What if the customer will resell the merchandise or has exempt status? 10

11 Through The Looking Glass The Drop Shipper s Dilemma The drop shipper as tax collector From whom does the shipper collect? What is the measure of the tax? Is it wholesale, retail or something else? How is the retail selling price determined? e ed? 11

12 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 policy regarding drop shipments? Is the sale to the customer exempt, and if so, how will the exemption be documented? 12

13 Irwin Mittleman, Meridian Global Services POTENTIAL NEXUS ISSUES

14 What Is A Drop Shipment? It is a three-party transaction. You have a seller, a supplier(drop p shipper) and a buyer. There is an element of a resale in every drop shipment. Why should you be concerned about the taxability of a drop shipment? 14

15 Sales Tax Nexus And Drop Shipments Vendors that utilize drop shippers to avoid holding inventory in a state need to understand that sales tax nexus is a question of activities in a state, not the utilization of property in a state. Nexus-creating activities can include providing services in that state, Scripto v. Carson(1960) 362 US 207 is still good law to this date. 15

16 Corporation Tax Nexus And Drop Shippers Most drop shippers need to be registered for corporation business taxes, because they maintain inventory in the state. Even if they do not carry inventory in the state, if they own or rent real property in a taxing jurisdiction, that could create nexus. 16

17 Is Sales Tax Registration ti Required For Persons Selling And Using Drop Shippers? Every state has its own rules. It is important to know if the taxing jurisdiction is a full member or an associate member of the Streamlined Sales Tax Project. See Sect. 317 (A) (8) of the Streamlined Sales and Use Tax Agreement for general guidance. Many of the larger states are not members of the Agreement. 17

18 Pitfalls For The Practitioner The taxing jurisdictions are getting sophisticated in auditing, and they continually are cross-referencing suppliers and purchasers for registration of the seller. If the seller is found to be subject to sales tax, then the tax base is the sales price paid to the ultimate purchaser. California presents special problems for drop shippers (see CA Tax Reg. 1706). 18

19 Can The Drop Shipper Be Considered Your Agent? If the drop shipper is an affiliated company, then a taxing jurisdiction can attempt to consider it your alter ego. Many states are attempting to find nexus on the basis of links on Web pages, which could create nexus if there are links on the Web pages of the drop shipper and the seller. 19

20 California Drop Shipments Present Challenges California basically does not recognize a drop shipment as a sale for resale. California treats the drop shipper as the vendor who is subject to collecting the tax. Because the sale from the drop shipper to the seller is usually a wholesale sale, a 10% inputted profit becomes part of the tax base (see CA Tax Reg 1706). 20

21 Vytenis Kirvelaitis, Grant Thornton ONGOING COMPLIANCE DEMANDS

22 Importance Of Exemption Certificates Registered vendor? You must collect sales & use tax. Otherwise, you may be liable for tax not collected. Exception: Customer provides a valid exemption certificate Sales and use tax audit Exemption certificates become critical to minimizing your liability on sales where tax was not collected. Grant Thornton. All rights reserved. 22

23 Documentation Requirements Exemption certificate details Purchaser name Vendor name Signature Date Description of the property being purchased Basis of exemption State exemption number or registration number Blanket or one-time use Grant Thornton. All rights reserved. 23

24 Documentation Requirements (Cont.) Missing Item On Exemption Document Purchaser name/ Vendor name Alternative Documentation For Support Correspondence with customer (e.g., fax cover letter, e- mail with company signature) Signature Sender information (e.g., fax cover letter, with name and title of sender) Date Correspondence with customer (e.g., fax with date, e- mail with date, cover letter with date, logbook recording information) Description of Purchase order, sales contract, correspondence with Property customer, shipping documents, logbook recording information, etc. Grant Thornton. All rights reserved. 24

25 Documentation Requirements (Cont.) Missing Item On Exemption Document Alternative Documentation For Support Basis of exemption Correspondence with customer (e.g., from representative making the exemption claim, logbook recording information) State exemption number or registration number States online database searchable records for verification Correspondence with customer Blanket use or onetime Correspondence with customer instructing use of the certificate as a blanket certificate or as a one-time transaction certificate Logbook recording information obtained Grant Thornton. All rights reserved. 25

26 Documentation Requirements (Cont.) Important Documentation (Other Than Exemption Certificates) Sales contract Shipping documents Purchase orders Correspondence with customer Credit application Grant Thornton. All rights reserved. 26

27 Documentation Requirements (Cont.) Good faith acceptance No knowledge that the certificate is false or fraudulently presented Reasonable ordinary due care standard: Falsity of the exemption claim could not have been discovered from exercise of reasonable ordinary due care. No duty to investigate or police customers Grant Thornton. All rights reserved. 27

28 Documentation Requirements (Cont.) Improper exemption claims Example 1: Type of purchaser precludes claim of exemption (e.g., ad agency claiming resale exemption) Example 2: Type of purchase does not fit within definition of the exemption (e.g., promotional materials exemption) Grant Thornton. All rights reserved. 28

29 Documentation Requirements Process Initial contact with customers Request new, updated or corrected certificates Review and validation of incoming exemption documents Determine whether certificate can be accepted in good faith Internal sign-off on exemption certificates Input of exemption documents Database and tax decision system Retain exemption documents as records Paper or electronic copies Grant Thornton. All rights reserved. 29

30 Policy On Internal Preservation Of Certificates: Expiration Of Certificates State Expiration Of Exemption Certificates Expiration Of Resale Certificates CO N/A 2 years (expires at end of odd-numbered years) CT 3 years Suggested update every 3 years FL Exempt use Indefinite; exempt entity 5 years 1 year IL 5 years Suggested update every 3 years IA Review periodically Review periodically ME N/A 1 year MD 5 years N/A MI 4 years 4 years MN Suggested update every 3 years Suggested update every 3 years NV 5 years Suggested update every 3 years NM 12 years 12 years OK 3 years 3 years SD Suggested update every year Suggested update every year WA N/A 2 to 4 years WV Suggested update every year Suggested update every year 8 Grant Thornton. All rights reserved. 30

31 Policy On Internal Preservation Of Certificates: Longer Record Retention Business decision Overall company policy Audit periods Voluntary disclosure look-back periods Statute of limitations Grant Thornton. All rights reserved. 31

32 Invoicing Customers Shipping information (destination) Sales tax of destination state Rate and taxability rules of destination state Example: Drop shipper must collect CA tax on either: 1. The actual retail selling price, or 2. The sales price + a 10% mark-up. Tax calculation and list of states Grant Thornton. All rights reserved. 32

33 Invoicing Customers (Cont.) Remote seller notification requirements If a remote seller s s in-state sales were $100, or more in the prior year, Then the remote seller must notify in-state customers of their use tax obligations in: Colorado Oklahoma South Dakota Grant Thornton. All rights reserved. 33

34 Invoicing Customers (Cont.) Information regarding submission of exemption certificates for future sales Contact, address, fax number Submission of exemption documentation: Grant Thornton. All rights reserved. 34

35 Irwin Mittleman, Meridian Global Services RECENT DEVELOPMENTS AND PROBLEMATIC STATES

36 Current Developments Hawaii recently amended its regulations to cover drop shipments. There are four scenarios covered. It is very important to know if the seller is registered in Hawaii, because if the drop shipper is registered and not the seller, then the sale to the unregistered seller is considered a retail sale subject to a 4% tax. There is also a wholesale importation tax to consider. 36

37 Current Developments (Cont.) Wisconsin is a recent member of the SSUTA. It had to amend its position effective with regard to drop shipments. Prior to that date, a registered drop shipper was required to collect sales tax on sales to non-registered sellers. As of October 2009(Notice, Wisconsin Dept of Revenue ) it could accept a resale certificate from the nonregistered seller. 37

38 Current Developments (Cont.) The Kentucky Revenue Department, in an FAQ published , allowed registered Kentucky suppliers to accept multiple types of resale certificates, including: The Kentucky resale certificate The Multistate Tax Commission resale certificate The Streamlined Sales Tax certificate of exemption 38

39 Current Developments (Cont.) Florida, in TAA No. 09A , opined that a sale from an Florida registered supplier to two non- registered out-of-state of sellers that directed that the product be shipped to Florida customers was a sale for resale, and not subject to sales tax. It noted that if the non-registered sellers were later found to have nexus, then the result would be different. 39

40 Current Developments (Cont.) Washington, as of , no longer accepts Washington resale certificates from resellers of property. A drop-shipper must now get from an unregistered seller either a Streamlined Sales and Use Tax certificate or an MTC exemption certificate bearing proper state identification. WAC Sect , eff

41 Caution About Registering i Out-of state sellers must evaluate very carefully the decision to register in a state, if all they do is buy from drop shippers that ship into a state. Registration can involve having a taxing jurisdiction require multiple-year liabilities. Many states might find that a company has nexus for taxes other than sales tax. Ohio commercial activities tax can be significant. 41

42 Intra-State Drop Shipments Do not assume that drop shipment rules only concern out- of-state sellers. Many states have local district sales taxes that might be affected by sellers in one district that take orders from instate sellers and have the product drop shipped into another taxing district. Texas provides guidance for the correct sales tax rate to be applied in that instance. 42

43 Must A Drop Shipper Obtain State Resale Certificates? If a company is drop shipping on a continual basis, then it is important to be knowledgeable about the state documentation requirements. New York utilizes its Form ST-120 for both registered vendors and unregistered vendors, in order to buy products for resale that are sold to end users in the state. 43