Connecticut: Surprising Drop Shipment Rules
- Jul 1, 2013 | Gail Cole
States with a sales and use tax have it for one reason: to collect revenue. Sales tax is collected by retailers when the transfer of tangible personal property takes place in the state. Use tax is remitted by consumers (at least in theory) when a retailer does not charge sales tax on a taxable sale, which often happens when consumers buy from out-of-state online retailers.
It's a simple enough model, but the model can become surprisingly complex when it involves drop shipping.
Just What is a Drop Shipment?
A drop shipment is when a customer purchases goods from a retailer and the goods are shipped to the customer directly from the manufacturer or wholesaler (rather than the manufacturer shipping the goods to the retailer so the retailer can ship them to the customer).
But what happens when the out-of-state retailer is not required to collect sales tax but the out-of-state wholesaler or manufacturer is? The Department of Revenue explains that, pursuant to Connecticut law:
"…The delivery in this state of tangible personal property by an owner or former owner thereof or by a factor, if the delivery is to a consumer pursuant to a retail sale made by a retailer not engaged in business in this state, is a retail sale in this state by the person making the delivery. Such person shall include the retail selling price of the property in such person's gross receipts." (Conn. Gen. Stat. §12-407(a)(3)(A)).
In other words, when a registered out-of-state manufacturer or wholesaler delivers the goods to the consumer in the state of Connecticut, it must collect and remit Connecticut sales tax.
This is neatly explained by the Connecticut Department of Revenue in Sales and Use Tax Rule for Drop Shipments. It also clarifies that the consumer owes use tax (rather than the retailer or wholesaler owing sales tax) in the following situations:
- When the wholesaler or manufacturer is not registered as a retailer in Connecticut; or
- When the goods are shipped by common carrier (and the goods were accepted by common carrier outside of Connecticut) or F.O.B. shipping point.
The Status Quo Challenged
For decades, the rule of thumb has been that out-of-state retailers don't have to collect sales tax in states where they don't have nexus (or a physical presence). More and more states are challenging that status quo with Amazon tax laws. Meanwhile, sales tax changes are being considered at the federal level.
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