3 Tips for Documenting Drop Shipping Tax Exemptions
Companies that drop ship can avoid the hassle of having to collect sales tax in most states by claiming a resale exemption. However, correctly documenting a drop shipment for tax purposes can be tricky, particularly when you do not know what form to use. Companies that don’t get it right can face the risk of higher audit tax liabilities. In this post I offer three tips for how to claim resale exemptions on drop shipments without increasing your business’ risk.
1. Choose resale as your exemption.
In order to document drop shipments, make sure you choose "resale" as the reason for exemption. I say resale because anything else might trigger the certificate being picked up during audit.
2. Use multijurisdictional forms with caution
Multijurisdictional forms are forms that allow you to have more than one state represented. Two of these forms are very helpful, the Streamline Sales Tax form with Multi-state Supplemental form (SST) and the Multi jurisdiction form (MTC), because both forms have space to document several states in one page. For those of you that are not familiar with the SST form, it consists of two pages, in the first page you can indicate at the top if you will be using the Multi-state supplemental form.
The idea of using these forms to document drop shipments in several state is very appealing, if you are the one filling them out. However, the business receiving the form sometimes has difficulty interpreting your intentions. Let’s remember that each state has different rules, and even though most states are represented in one page, each state per line should be treated independently.
If you have no nexus in a state that you are drop shipping into, it is ok to add “no nexus” next to the state where you are not registered, so long as you enter all the other state registration numbers were you do have nexus. Be aware that it is still up to the recipient business to decide if they will accept your form. Depending on each company's drop shipment rules they might accept it, or ask you to complete a different state specific form. Or perhaps they might just tell you that you are taxable no matter what. All of these reasons could be good positions for accepting or rejecting a form, and usually is based on prior audit experience.
3. Have a plan to renew the drop shipment certificates
One of the trickiest parts of accepting drop shipment certificates is identifying a policy that fits your organization regarding renewals. A lot of state certificates do not expire; however, it is important that you establish a renewal period in order to keep abreast of any changes in nexus that your customers might be experiencing. Not to say the original “no nexus” certificate is not acceptable if it never expires, but it is best to replace such certificate if the future conditions have changed.
Overall, do not shy away from using the multijurisdictional certificates to express your current drop shipment status, but be mindful on how you communicate your intentions. If necessary, take the time to add additional documentation to your certificates. In the end, you want to make sure you are covered under audit, and a bit more information might go a long way.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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