New Use Tax Guidelines for Resellers: Drop Shipments

July 3, 2018

As you know, WS Display offers a drop shipment service that blind ships orders directly to your customer on your behalf. Meaning, we print your business name and address on a label and place it on the box as the return address and your customer’s information is placed as the shipping address. And if you desire to utilize this service, it is via request.


As many of you know we are located in a number of states. The California Department of Tax and Fee Administration, the Pennsylvania Department of Revenue and the State of Hawaii Department of Taxation requires us to collect use tax on purchases shipped to each of their states. Out of state retailers are liable to any tax due.

What does this mean for you?


If you request a drop shipment to your customer whose shipping address is located in California, Pennsylvania, or Hawaii and your place of business is located outside of one of these three states, then you are required to pay use tax. *To file for exemption from paying use tax at time of purchase, you must obtain and submit to us a reseller’s certificate for the state in which the drop shipment is going (only applies to CA, PA, & HI). To self-report use tax, you will need to apply for a Certificate of Registration-Use Tax on each corresponding state. To be clear, if you never ask us to drop ship to California, then you don’t need a California reseller’s certificate, and the same logic is applied to the other 2 states. Whichever state you want us to drop ship to, that is the state reseller’s certificate we need to retain.


*If you don't submit a reseller’s certificate, but you need us to drop ship to CA, PA, or HI, then we will collect tax at the time of the order. Please keep in mind that tax for orders shipping to California will be calculated at a 10% mark up - please see the Examples section below. Orders shipping to Pennsylvania will be charged tax at a 6% rate. And orders shipping to Hawaii will be charged tax at a 0.5% rate.

Ex. 1 Your business is based in Nevada. Your customer is located in Carlsbad, California and you request we drop ship it to them. At the time of order, you will be charged tax at Carlsbad’s rate of 7.75% based on a 10% markup of the product. The product will not be marked up for your order; only the taxes due is based on a 10% markup of the product and on the city tax rate. If you submit to us a California reseller’s certificate, then you will NOT pay us any tax.


Ex. 1.a. - Let’s say the WSDisplay price for example product is $100, and it drop ships to Carlsbad, CA. Carlsbad tax rate is 7.75%.

$100 x 1.1% (10% markup) = $110.00
$110.00 x 7.75% = $8.53
$100 (wholesale price) + $8.53 (tax due) = $108.53


Ex. 2 Your business is based in New York. Your customer is located in Harrisburg, PA and you request we drop ship it to them. At the time of order, you will be charged tax at Harrisburg rate of 6% tax. If you submit to us a Pennsylvania reseller’s certificate, then you will NOT pay us any tax.


Online Submission

1. You should get an email from us requesting missing certificates. (If not, please email us at info@wsdisplay.com or call us at (800) 640-9544.)
2. Within the email, click the direct link to login to Avalara CertCapture.

3. After logging in, you can select either fill out online form or upload a copy of your certificate.

View Your Status

To view your status, simply login back into Avalara CertCapture. Again, use the direct link that can be found in the same email we sent you for your online submission.

Who is Avalara?
Avalara is a software for automated tax compliance whom we have partner with to collect and record sales tax.

What does it mean to have a Nexus
Nexus is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. A nexus can be created by having a physical presence in the state, having employees. In some cases, however, the use of a drop shipper or a contract with a distributor that functions as a drop shipper is considered a taxable nexus creating activity.

What does Blind Drop-ship mean?
Blind Drop-ship is the action of moving goods from the manufacturer directly to the retailer without going through the usual distribution channels. As a result, the merchant never sees or handles the product.

How is the Sales tax going to be calculated?
The sales tax will be calculated by Avalara who is comprised of Avatax and Certcapture

How would Avalara calculate the sales tax rate?
Avalara will look for a copy of a reseller certificate under the CertCapture website, this is a site for Certificate records to be logged and match to each client. If a client has a certificate for the ship to state on file, avatax will not calculate any sales tax but if there isn’t any certificate on file then a tax rule will be applied based on the drop-ship state.

Which States do not accept Out-of-state resale Certificates?
California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Washington, Washington D.C.


CALIFORNIA


I have already submitted a copy of my Seller's Permit, is this sufficient to be sales tax exempt?
A seller’s Permit is not a buying permit. You will still have to pay tax on all items you use rather then sell in your business (Such as office supplies)

What is the difference between a Sellers Permit and a Reseller Certificate?
A seller’s permit is a State issued document that allow businesses to make sales in California. Once you have a seller’s permit, you may issued resale certificates to your suppliers to buy items you will sell in your business Operations. Issuing a resale certificate allows you to buy these items without paying tax to the seller.

I am an out of state reseller why do I need to pay sales tax to CA?
Since we currently have a nexus in the state of California, the state requires us to collect sales tax on all drop shipments to the state of California on our clients behalf unless our clients is registered with the state of California and possesses a Valid California Resale certificate.

Where can I get more information about the drop shipment rules?
You can review the drop ship rules for the state of CA by visiting their website Publication 121, Drop shipments & Laws, Regulations & Annotations
To contact the California Department of tax and Fee Administration, please call their toll free number 1-800-400-7115 Or visit BOE CA website

How do I apply for a CA reseller Certificate?
You can register for a Certificate of Registration-Use Tax by going to the California Department of Tax and Fee Administration

Example of CA Resale Certificate Form

You can also reach out the California Department of Tax and Fee Administration for further questions by calling their toll Free number 1-800-400-7115

I just obtained a California Reseller Certificate, can you refund the sales taxes I paid a 1 month ago?
Unfortunately we are unable to refund it for you as the sales tax has already been submitted to the state of California on your sales.

I just obtained a California Reseller Certificate, can you refund the sales tax I paid yesterday?
A Copy of the except certificate must be provided prior the order is finalized and invoiced, If the order hasn’t been invoiced then it can be adjusted and refunded. Unfortunately once an order has been finalized we are unable to refund the sales tax.
What does the Drop ship rule states?
For all Drop shipments we are required by the state of California to calculate the retail selling price of all drop shipments of property based on its selling price of the property to the true retail plus a markup of 10 percent (10%) On to which sales tax will be collected.
Example
If the drop shipper knows the California consumer purchased the merchandise for $250, tax should be based on that amount. However, if a drop shipper charges a true retailer $200 and does not know the selling price to the California consumer, the drop shipper should report and pay tax on a retail selling price of $220 ($200 +10% markup of $20 = $220)
More Information,click here
How long is a California reseller certificate good for?
California reseller certificate do no have an expiration date and they are good until each company decides to close the account with the State.

Why does the state wants us to calculate sales tax based on a 10% markup?
The state of California believes that when out of state clients have products drop ship to the state of california by a California Vendor, they are selling the product at a higher cost then what the vendor sold it to for resale. The state of California states that drop ship companies need to collect sales tax based on the retail cost to the California consumer, however if the retail cost is not known by the drop shipper, the state will accept that the drop shipper calculates the sales tax based on a minimum markup of 10% from the originally purchased. By calculating this markup they believe the out-of-state vendor is paying a more fair sales tax to the state of California.

Who is Affected by this California Drop ship rule?
This rule only affects out of state clients with no California reseller certificate on file and who wish for us to drop ship their Sales order within the state of California.

Do we collect sales tax to orders shipping to any other states aside from California, Pennsylvania and Hawaii?
No, Currently we are only required to collect sales tax on order where we currently have nexus. If an order is shipping to any other state where we do not have nexus, no sales tax will be collected.



PENNSYLVANIA

I have a California resale certificate but I need you to drop ship my product to my customer in Pennsylvania, Why do I need to pay Pennsylvania Sales tax?
WSdisplay currently pays sales taxes in 3 different states where we are required to collect sales tax on all drop shipments, California, Pennsylvania and Hawaii. Since Pennsylvania is one of our nexus states, we are required by the state of Pennsylvania to collect sales tax on all product ship to a Pennsylvania address unless our client provides a valid Pennsylvania resale certificate Or fill out the Pennsylvania Exemption Certificate and submit this to us.

Does Pennsylvania accept my out of state reseller certificate for my sales purchases to be tax exempt?
Pennsylvania would accept an out of state reseller certificate in good faith given that purchasers fill out their form REV-1220 and submit this to their vender and explain the reason for their exception.

Where can I download a Pennsylvania Exempt Certificate?
REV-1220 form can be downloaded it using the link HERE.

If I do not submit an REV-1220 form to WSDisplay, how much tax do I need to pay for my drop ship orders to the State of Pennsylvania?
Pennsylvania is an origin-base sales tax state, which means sales tax rates are determined by the location of the vendor. Our location base tax in Carlisle PA is 6%.

Where can I get more information about the drop shipment rules?
You can call the Office of Chief Counsel at 717-787-1382 or email RA-nexus@pa.gov and talk to a Pennsylvania state lawyer.
PENNSYLVANIA: NEXUS RESOURCES FOR RETAILERS

Which sections of REV-1220 need to be filled out if I am an out of state customer?
Please see highlighted section on the Pennsylvania Exemption Certificate sample on page 7

What is Taxable in the state of Pennsylvania?
Sales tax applies to all tangible personal property as well as Shipping and Handling.


HAWAII

What is GET?
GET is General Excise Tax collected by the state of Hawaii

How much GET do you collect for drop shipments to Hawaii?
Since we provide wholesale services on our goods and manufacture we collect a 0.5% GET

If I am a non Hawaii resident can I apply for a Tax Exempt Certificate in Hawaii?
Currently Hawaii does not issue tax exemption certificates to tourist or other non residents to exempt their purchases from Hawaii Businesses.

Would the state of Hawaii accept my out of state reseller certificate?
No, currently Hawaii does not accept any out of state reseller certificate for GET exemptions.

Required sales tax Exemption certificates for Drop shipments to nexus states (CA, PA, HI)

For more information regarding drop shipments or how to obtain a reseller’s certificate or certificate of registration-use tax, see links below.

California
Pennsylvania
Hawaii

For general tax questions, contact the numbers below.
California
Toll-free: 1-800-400-7115
Outside the US: 1-916-445-6362

Pennsylvania
Business Taxes: 1-717-787-1064
Hawaii
Taxpayer Services: 1-808-587-4242
Toll-free: 1-800-222-3229