Third-Party Drop Shipment Analysis

Third-party shipment or ‘drop shipment’ of property to customers is growing in frequency as an affordable way for remote sellers to conduct business without taking possession of inventory.  In a typical third-party drop shipment arrangement, a customer in State “A” orders property from a retailer located in State “B” who instructs their supplier in State “C” to send the goods directly to the customer in State “A”.   The flow of money follows the same pattern: customer pays the retailer who then pays supplier.   The transaction between the retailer and the vendor is a “purchase for resale” and the sale from the retailer to the customer is likely a final “retail sale”.  To avoid the retailer being charged sales tax by the vendor, the retailer will need to provide them with a valid resale certificate in the state where the property is shipped (State “A”).

In a vacuum, this process sounds easy to manage.  In reality, though, third-party drop shipments are fraught with risks and challenges.  The most significant issue concerns the use of the proper resale certificate to provide to the vendor by the retailer.  What certificate is valid in the “ship to state”?  Does either the vendor or retailer have nexus in that state?  What happens if the vendor charges the retailer tax?

Interstate Tax Strategies helps both retailers and vendors navigate this turbulent area.  If you are a vendor that drop-ships for your retail customers, we can help you identify the critical steps you need to take to prevent future audit issues.  If you are retailer, we can help you manage and possibly avoid being charged tax by vendors in state where they have nexus.

As third-party drop shipments become more popular the sales tax risks also grow.  Now is the time to have Interstate Tax Strategies assist you in assessing your risk and assist you in implementing proper procedures for sales tax compliance.

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Our mission is to help your business understand and navigate the increasingly complicated interstate sales tax landscape. Regardless of your industry, if you operate in more than one state, you are an interstate business and you must evaluate the sales tax rules in each state where you conduct business. Even if you are only in one state, don’t assume your sales tax processes and procedures are correct. Each year, states collect millions of dollars in taxes, interest, and penalties on audit from businesses who thought they were handling their sales tax properly.

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