Besides questions about sales tax nexus, how to exempt drop shipments from sales tax is the second most common question I hear. From the perspective of a retailer selling a product to a customer and having a manufacturer/distributor drop ship the product to your customer, it’s obvious that this is a resale transaction. However, from the state’s perspective, there are two distinct transactions:drop_shipment

  1. The transaction between the manufacturer/distributor selling the product to a retailer and drop shipping the product; and


  1. The transaction between the retailer and the customer.

In the first scenario above, the manufacturer/distributor should charge sales tax on the transaction if they have sales tax nexus in the state where they are drop shipping the product. Where this becomes an issue for the retailer is that the retailer may not have sales tax nexus in the destination state and they do not charge sales tax to the customer. The retailer is caught in the middle and could be responsible for paying the sales tax to the manufacturer/distributor. At the same time, the customer may accrue use tax on the transaction seeing that the retailer did not charge them sales tax. (This results in double taxation which we discussed in our previous blog.)

The answer is for the retailer to provide a resale exemption certificate to the manufacturer/distributor. Easier said than done in some states. In these drop shipment transactions, states tend to fall into two categories as to whether they will accept a resale exemption certificate from the retailer’s home state or whether the retailer needs to issue a resale exemption certificate from the destination state of the customer. States like Georgia, will accept the retailer’s home state resale exemption certificate while California requires a California resale exemption certificate.

States similar to California present a challenge as the only way to provide a valid resale exemption certificate is to register for sales tax purposes in the state. Once registered, the retailer is then required to collect and remit sales tax on all applicable transactions. At last count, there are 12 states that require a retailer to be registered in a state in order to present a valid resale exemption certificate. So a retailer based in a single state, with no sales tax nexus other than their home state, could be required to register in as many as 12 states to ensure they are able to provide valid resale exemption certificates in conjunction with drop shipment transactions.

For a list of specific states requiring a sales tax registration, please contact us.


Brian Greer

Written by Brian Greer