Q&Ablog-auditsandmore

We field all sorts of interesting questions about tax compliance here at Avalara. This week, we explore what happens when products and customers cross international borders. For example,

When a foreign customer (Canadian) picks up TPP product at our warehouse in the U.S., with their truck, is their sale taxable in that U.S. state jurisdiction? How is it different than a third party freight company picking up as FOB-shipping point?

As a general rule, vendors are required to collect sales tax whenever they transfer possession of a taxable good or service to a customer in a state where the vendor has nexus. Having a customer pick up a purchase at a warehouse would normally qualify.

However, some states make allowances for purchases that are being immediately transported to another state or country.

Policies differ from state to state (as with all things sales tax). California, Minnesota and Texas provide good examples of three different policies towards property picked up in the United States and taken into a different country.

In California, sales tax generally applies “when property is delivered in California to the purchaser or the purchaser’s representative prior to an irrevocable commitment of the property into the process of exportation. It is immaterial that the disclosed or undisclosed intention of the purchaser is to ship or deliver the property to a foreign country or that the property is actually transported to a foreign country.”

To be exempt as an export, the property must be intended for a destination in a foreign country and must be irrevocably committed to the exportation process at the time of sale, and must actually be shipped or delivered to the foreign country by the retailer prior to any use of the property (Sales and Use Tax Regulations, Article 11).

Merchandise sold and picked up in Minnesota by the purchaser for use in a trade or business outside of Minnesota (including in another country) is generally subject to sales tax (RN_93-09). However, tangible personal property is exempt if all of the following conditions are met:

  • The TPP, “without intermediate use, is shipped or transported outside Minnesota by the purchaser, or is stored, processed, fabricated or manufactured into, attached to or incorporated into other TPP that is transported or shipped outside Minnesota;”
  • The TPP “is used in a trade or business outside Minnesota after being shipped or transported outside Minnesota, and is not returned to Minnesota, except in the course of interstate commerce;” and
  • The TPP “is either (1) not subject to tax in the state or country to which it is transported for storage or use, or (2) to be used in other states or countries as part of a maintenance contract.”

“Storage or processing, fabricating, manufacturing, attaching to, or incorporating into other property” is not considered to be intermediate use for the purposes of this subdivision (Minnesota Statutes, section 297A.68, subdivision 13).

In Texas, the vendor must collect sales tax if the buyer takes possession of the merchandise in Texas and then takes it to another country. But once the customer exports that item and provides an acceptable form of proof of export, the vendor may refund the tax collected. Sellers are required to keep a copy of the export certification for at least four years (to substantiate that the sales tax refund was for an exported product in the event of an audit) (Texas Sales Tax FAQs).

How is it different than a third party freight company picking up as FOB-shipping point?

FOB stands for “Free on Board.” The term is an English shipping phrase as a way to describe who was liable for the cost of goods damaged or sunk while in transit: the seller or the buyer. “FOB origin” means ownership is transferred as soon as the product leaves the seller’s hands (if the ship sinks, the buyer pays). “FOB destination” means ownership transfers when the product is delivered to the buyer (if the ship sinks, the seller pays).

FOB shipping point is the same as FOB origin: the buyer is responsible for shipping costs and is responsible for the goods as soon as the goods leave the seller’s premises.

When a third party freight company picks up goods as a FOB shipping point and transports them to another country on behalf of the seller, ownership transfers when the freight company takes possession of the product on behalf of the customer. The transfer of ownership still takes place in the state, and state sales and use tax rules apply.

Have a compliance question of your own? Ask the forum.