Double Taxation On Drop Ships

So You Don’t Drop-Ship Items To Your Customers? You Still May Be A Victim Of Double Taxation.
In our last newsletter we discussed the sales tax implications for manufacturers and/or distributors who drop ship items to customers. We also offered a state-by-state chart showing how each state handles tax on drop-shipped items. This week we’re going to explore the other side of the issue.

Almost All Companies Purchase Drop-Shipped Items
It’s more common for companies to purchase items and have it delivered rather than going going to retail locations. Many of these purchases are drop-shipped items. For example, your company may buy supplies from the catalog of a local supplier. But in fact, that supplier might be just a catalog company and the product is drop-shipped to you, their customer. They might never even touch the product.


States Commonly Collect Tax Twice On Drop-Shipped Items
As we discussed last time, some states require the distributor to pay tax on the transaction at the time the product is drop-shipped, however, most companies accrue tax on these items to satisfy their use tax obligation. If you haven’t picked up on it already, when the distributor pays tax on a shipment and the user pays tax on the same order, then the state is collecting the tax twice.Double taxation is not legal in any state.

Here’s An Example:
In California, if a manufacturer is registered in the state but a distributor is not, the manufacturer is required to collect sales tax on the sale to the distributor. In fact, they collect tax on the sale after an additional 10% markup.

Let's say Your Company purchases computer equipment from Distributor located in Washington. Distributor arranges for Manufacturer to ship the product on their behalf to you. Manufacturer is registered in every state. Distributor is not registered in California. Manufacturer is required to collect the California tax after adding an additional 10% markup to the price charged from Distributor. Distributor does not show the tax to you. Your Company is registered in California and accrues tax on the purchase to satisfy your use tax obligation. Your Company and Distributor both paid tax on the sale to California. Double taxation is alive and well!State Laws Vary Widely On Drop-ShipsLike anything else in state and local tax, these laws vary from state to state. The scenario above is not the same in every state. A thorough review of state laws will help in determining the possibility of credits available.

Review For Credits Or Refunds
A quick review by a state and local tax firm like Peisner Johnson & Company is the most effective way of conducting this type of review. We often conduct these type of reviews on a performance basis. Please contact us if you would like more information, or to be contacted regarding our FREE Refund Review.

Click here if you would like a copy of our Drop Ship Chart.