I recently received a phone call from client who had heard about using a “No Nexus” letter as a way to stop suppliers from requesting resale exemption certificates in states where drop-shipments were being made. This issue surfaces every 5 years or so, so it took me a minute to understand what they were wanting to accomplish.
In a 3rd party drop-shipment the supplier asks their distributor to ship property to supplier’s customer in some remote state. This happens all the time. In this situation, the transaction between the supplier and their distributor is a purchase for resale transaction. As such, distributor needs to obtain a valid exemption certificate in the state where the sale is made (customer’s state). The distributor’s request for a resale certificate will be based largely on where they have nexus and where they are registered. If the distributor has nexus in the state where supplier’s customer is located, then distributor will require that supplier provide them a resale certificate valid in that sate.
Again, depending on the rules of the state, the ship-to state may allow the supplier to give the distributor a certificate from the suppliers “home” state, or it may accept the “home state number” on the ship-to state form, or it may require supplier to provide a certificate with the “ship to” state registration number. In either case, the requirement for giving the distributor an exemption certificate is driven by distributor’s nexus and not the supplier’s nexus.
If the supplier does not have nexus in the ship-to state and the ship-to state will not accept any type of “home state” number, there is a problem. If distributor has nexus in the ship-to state it has 2 easy options: 1) require an exemption certificate or 2) charge tax. I’ll discuss option 3 later. This is where the concept of the “No Nexus” letter comes into play. Some suppliers erroneously believe that if they simply give the distributor some letter that says “we don’t have nexus and don’t need to register to get the proper exemption certificate” that the distributor will take this and move along. Think again. With the exception of a very narrow provision in one or two states, the use of the “No Nexus” letter to avoid registration is unlikely to be accepted by the state. As a seller, this puts you at risk for making a “sale for resale” without a valid resale certificate.
As a supplier, if you don’t want your distributor to charge you tax in the ship-to state then you have two options 1) register in the ship-to state even if you don’t have nexus. (that’s what the states want anyway) or 2) have the distributor ship the goods to another state where you do have an exemption certificate and then pay the fee to ship the goods yourself to the customer. That’s it. Any use of a “no nexus” letter must be specifically authorized by the state.
Interestate Tax Strategies