While the concept of drop shipping seems simple, the sales tax issues vendors and shippers face can be quite complicated. For CRUSH 2016, Avalara’s national tax compliance conference coming up May 9-11 in New Orleans, we sat down with one of the conference speakers, Marilyn Wethekam, partner, Horwood Marcus & Berk, to learn more about “Drop Shipping: Friend or Foe,” the session she is co-presenting with Breen Schiller, another partner at her firm.
Avalara: What are a few concepts you hope attendees take away?
Marilyn Wethekam: The goal of the session is to have attendees understand how to analyze a drop shipment transaction. More specifically, I want them to understand what states have the jurisdiction to tax the transaction, the type of documentation required to support exemptions, and, from a proactive standpoint, what type of language should be included in contracts and purchase orders.
Avalara: That sounds good for end users, but why is this an important issue for accountants?
MW: With the economy moving quickly toward a digital economy, drop shipments have become the norm, not the exception. Therefore, when advising clients, it’s key to help them understand the party that has a tax collection requirement and the party that can provide a valid exemption document if the transaction is exempt, as well as how to address an audit of these types of transactions. The failure to collect or support an exemption at the time of the transaction can become very costly three or four years later, when the business could be under audit. In addition, small businesses use these types of transactions to manage inventory costs so that they can understand and address those issues; accountants need to know about this, too.
Avalara: What are some of the sales tax challenges vendors face when it comes to drop shipping?
MW: There are three: obtaining the correct exemption documentation, determining if there is a collection requirement, and if so, in what jurisdiction, and determining whether third-party transactions create nexus for one of the intermediary parties.
Avalara: How do you feel technology has helped with drop shipping?
MW: Technology assists with the collection and retention of the correct exemption documentation, as well as keeping a current database for how specific the jurisdictions handle/approach these types of transactions. This database can be a list of official materials, such as bulletins, regulations or a court decision.
Avalara: What are you looking forward to most at CRUSH?
MW: The opportunity to interact with attendees and the Avalara staff.
Join Marilyn Wethekam for her session, “Drop Shipping: Friend or Foe,” on May 11. For more information on CRUSH 2016, visit our website that includes all conference sessions, speaker bios and location information.