TaxConnex held a webinar yesterday regarding sales tax nexus and drop shipments.   The webinar was organized into three topics:

  • sales tax nexus
  • new developments related to sales tax nexus – for example economic nexus and notification requirements,
  • and finally drop shipments

The discussion of drop shipments sometimes seems out of place with a nexus discussion; however, it’s critical to understand the role of sales tax nexus in determining how to manage drop shipment transactions.  Interestingly, most of the questions from the audience were related to drop shipment rules and how to exempt certain transactions from sales tax.

The real key piece to understand with drop shipments is that there are two distinct transactions involved.  drop shipment 3.jpg

Generally, there’s a sale between a manufacturer and a distributor where the manufacturer ships product to the distributor’s customer and invoices the distributor for the sale.  Sales tax applies based on the destination of where the product is shipped and if the manufacturer has sales tax nexus in that state then the manufacturer charges sales tax.

Separately, the distributor is making a sale to their customer.  Sales tax is applied based on where the product is being shipped and if the distributor has sales tax nexus in that state, then they charge sales tax to their customer.

For the distributor, a problem exists when the manufacturer has sales tax nexus in the destination state and thus charges sales tax; but the distributor does not have sales tax nexus in the destination state and therefore does not charge sales tax to their customer.  The distributor wants to exempt this transaction from sales tax by providing a resale exemption certificate to the manufacturer.  This resale exemption certification needs to be valid for the destination state.  This is where we take a turn…..

Some states, Georgia is one, will allow an out of state distributor to exempt the sale in Georgia with their home state resale exemption certificate or their home state sales tax id number on the Georgia resale exemption certificate.  California is not so friendly.  California requires a sales tax registration and a California sales tax id on the California resale exemption certificate.

For the distributor, and the manufacturer, it’s critical to know which states are like Georgia and which states are like California.  IPT publishes a bi-annual (every other year) guide that can help.  You can purchase this survey through IPT for $275 (  Sometimes the states are not entirely clear on the responses they provide to IPT and IPT does not attempt to interpret the responses from the various states.  For more thorough assistance, you might need the help of a sales tax firm like TaxConnex to understand exactly how to exempt various drop shipment transactions.


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Brian Greer

Written by Brian Greer