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Sales and Use Taxes: Drop Shipment Transactions (Portfolio 1340)

Product Code: TPOR44
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Sales and Use Taxes: Drop Shipment Transactions analyzes the general issues that arise from drop shipment transactions, transactions which generally involve three parties: a customer, a retailer, and a third-party supplier who is instructed to deliver the goods directly to the customer. It is the triangular structure of these transactions that raises numerous sales and use tax issues. 

Written by Marilyn A. Wethekam, Esq., Horwood, Marcus & Berk, Chtd., and Kendall L. Houghton, Esq., Baker & McKenzie LLP, this Portfolio addresses these issues according to three broad categories: constitutional issues, legal issues, and administrative and policy issues.  

Sales and Use Taxes: Drop Shipment Transactions begins with an overview of the Due Process and Commerce Clause with particular consideration of the nexus issues for drop shipment transactions.  It examines the constitutional issues that arise from imposing collection responsibilities on out-of-state sellers and identifies Commerce Clause discrimination considerations. 

The Portfolio then examines the legal and administrative issues that arise under the specific state statutes and regulations. It discusses key issues, including: 

  • Registration requirements,
  • Liability for tax,
  • Documentation of transactions,
  • Exemption certificates,
  • Registration requirements, and
  • Obtaining and maintaining exemption documents.

In addition, the Multistate Tax Commission's (MTC) views on the taxability of drop shipment transactions are considered. Analysis is given to the MTC Model Uniform Drop Shipment Statute and the MTC's discussion draft of possible nexus guidelines for sales and use tax on remote sellers. 

Finally, the Portfolio also considers the approaches taken by all fifty states and the District of Columbia in addressing the taxation of drop shipment transactions. It includes a summary of current statutes and regulations and provides administrative and/or judicial interpretations for each state.

Worksheets included in this Portfolio address the MTC Proposed Drop Shipment Statute, the Streamlined Sales Tax Project Drop Shipments Amendment #6, and the Streamlined Sales Tax Project Drop Shipments Issue Paper. 

Sales and Use Taxes: Drop Shipment Transactions allows you to benefit from: 

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Plain-English guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

Detailed Analysis

1340.01. OVERVIEW

A. Taxation of Drop Shipment Transactions – Nature of the Problem

B. Drop Shipment Transactions Defined

C. Basic Forms of Drop Shipment Transactions

D. Issues Arising in the Particular Transactions

1340.02. GENERAL ANALYSIS OF DROP SHIPMENT TRANSACTIONS

Introductory Material

A. Location of the Sale

B. Sales for Resale Exemption

C. Treatment of Sale to Customer

1340.03. CONSTITUTIONAL ISSUES

A. General Overview: The Due Process and Commerce Clause Inquiries

B. Due Process and Commerce Clause Nexus Issues for Drop Shipment Transactions

1. Out–of–State Sellers and Use Tax Collection Requirements, Prior to Quill

2. Substantial Nexus and Physical Presence

a. Due Process and Commerce Clause Nexus Standards Evolve

b. Quill Establishes Two Distinct Constitutional Nexus Standards

c. Post–Quill Interpretations of “Substantial Nexus”

3. Drop Shipment Transaction Nexus Standards

C. Commerce Clause Discrimination Considerations

1340.04. LEGAL, ADMINISTRATIVE AND POLICY ISSUES

A. Overview

B. Legal Considerations

1. Registration

2. Liability for Tax

3. Documentation/Exemption Certificates

C. MTC Perspective

1. Model Uniform Drop Shipment Statute

2. Proposed MTC Nexus Guidelines

1340.05. SPECIFIC STATES' APPROACH TO DROP SHIPMENTS

Introductory Material

A. Alabama

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

B. Alaska

C. Arizona

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

D. Arkansas

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

E. California

1. Summary of Current Statutes and Regulations.

2. Administrative and/or Judicial Interpretations

F. Colorado

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

G. Connecticut

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

H. Delaware

I. District of Columbia

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

J. Florida

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

K. Georgia

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

L. Hawaii

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

M. Idaho

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

N. Illinois

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

O. Indiana

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

P. Iowa

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

Q. Kansas

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

R. Kentucky

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

S. Louisiana

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

T. Maine

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

U. Maryland

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

V. Massachusetts

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

W. Michigan

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

X. Minnesota

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

Y. Mississippi

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

Z. Missouri

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

AA. Montana

BB. Nebraska

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

CC. Nevada

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

DD. New Hampshire

EE. New Jersey

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

FF. New Mexico

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

GG. New York

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

HH. North Carolina

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

II. North Dakota

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

JJ. Ohio

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

KK. Oklahoma

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

LL. Oregon

MM. Pennsylvania

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

NN. Rhode Island

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

OO. South Carolina

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

PP. South Dakota

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

QQ. Tennessee

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

RR. Texas

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

SS. Utah

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

TT. Vermont

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

UU. Virginia

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

VV. Washington

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

WW. West Virginia

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

XX. Wisconsin

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

YY. Wyoming

1. Summary of Current Statutes and Regulations

2. Administrative and/or Judicial Interpretations

Working Papers

Item Description Sheet

Worksheet 1 MTC PROPOSED DROP SHIPMENT STATUTE

Worksheet 2 MTC Discussion Draft: State Participant Revised Public Participation Working Group Draft of the Constitutional Nexus Guideline for Application of a State's Sales and Use Tax to an Out–of–State Business

Worksheet 3 Streamlined Sales Tax Project Drop Shipments Amendment # 6

Worksheet 4 State Authority For Drop Shipment Transactions

Worksheet 5 Streamlined Sales Tax Project Drop Shipments Issue Paper

Bibliography

Bibliography

Kendall Houghton
Ms. Houghton was a partner with the state and local tax practice group of Alston & Bird, LLP, when this Portfolio was originally written. From September 1993 through December 1997, she served as General Counsel to the Committee On State Taxation (“COST”), a nonprofit trade association that promotes the equitable and nondiscriminatory state and local taxation of multijurisdictional business entities through judicial and legislative advocacy, educational efforts, and policy development. Prior to joining COST, Ms. Houghton served as an associate in the Atlanta, Georgia law firm of Alston & Bird, where her practice focused on state and local tax planning and controversy. Ms Houghton has published numerous articles on state tax and related issues and is a frequent public speaker at conferences hosted by such groups as COST, the Tax Executives' Institute, the Federation of Tax Administrators, the American Bar Association, and the National Association of State Bar Tax Sections. She is a member of the Advisory Board of the State Income Tax Alert and is the Managing and Chief Production Editor of the ABA Section of Taxation's State and Local Tax Lawyer journal. Ms. Houghton received her A.B. degree (cum laude) from Harvard University, her J.D. degree from the New York University School of Law, and her LL.M. in taxation from Emory University School of Law. She is admitted to practice in Georgia.  
Marilyn Wethekam