Does an out-of-state vendor that drop ships products directly from its manufacturer to Missouri customers have to collect and remit Missouri sales tax, even if it has no physical presence in the state and its sales are under $100,000?

Subject

Third Party Drop Shipment

Plain-English summary

The Missouri Department of Revenue ruled that an out-of-state vendor who drop ships a manufacturer's products directly to Missouri customers is NOT exempt from collecting and remitting Missouri sales tax on those sales -- even though the vendor has no physical nexus in Missouri and its sales into the state don't exceed $100,000.

Applicant sells a manufacturer's products into Missouri, and every order is drop shipped directly from the manufacturer to the customer in Missouri. Applicant asked whether it could skip collecting and remitting sales tax on these orders since it lacks a physical presence in the state and its sales volume is below $100,000.

The Department said no. Under Section 144.020.1, RSMo, Missouri imposes sales tax on sellers for the privilege of selling tangible personal property at retail in the state. The key question in a drop-shipment arrangement is where title to the goods transfers. Under 12 CSR 10-113.200(1), a sale is subject to Missouri sales tax if title transfers in Missouri, and under 12 CSR 10-113.200(3)(C), when an out-of-state seller delivers property to a third-party carrier for delivery to Missouri, title transfers in Missouri.

The ruling explains how title moves in a drop shipment: the seller (Applicant) takes an order from its customer, places that order with its own supplier (the manufacturer), and directs the manufacturer to ship directly to the customer. When the order is delivered, title passes first from the manufacturer to Applicant, and then immediately from Applicant to the customer -- and both of those transfers happen in Missouri, because that's where delivery occurs. Because title to the products always transfers to Applicant, and then to the customer, within Missouri, all of Applicant's drop-shipped sales to Missouri customers are subject to Missouri sales tax, and Applicant must collect and remit it.

What this means for you

Out-of-state vendors using drop shipment into Missouri

If you sell products that are manufactured or warehoused by a third party and shipped directly to your Missouri customers, this ruling means you can't assume you're off the hook for Missouri sales tax just because you don't have a warehouse, office, or other physical presence in the state. What matters is where title to the goods transfers -- and under Missouri's regulations, that's the state where the carrier delivers the goods to the end customer. If that's Missouri, the sale is taxable there.

Sellers relying on a sales threshold instead of nexus analysis

Applicant argued its sales didn't exceed $100,000, but the Department's response didn't turn on that dollar figure at all -- the ruling doesn't validate a $100,000 safe harbor as a basis for exemption from collecting drop-shipment sales tax. Don't assume a low sales volume alone excuses you from collecting tax; the title-transfer analysis under 12 CSR 10-113.200 applies regardless of sales volume as framed in this ruling.

Accountants and tax professionals

When advising a client that uses drop shipment to fulfill Missouri orders, walk through the title-transfer chain described here: supplier to seller, then seller to customer, both occurring at the point of delivery. If delivery happens in Missouri, both legs of that transfer occur in Missouri, and the retail sale to the end customer is subject to Missouri sales tax under Section 144.020.1, RSMo, regardless of whether your client has a brick-and-mortar or warehouse presence in the state.

Common questions

Q: Is Applicant exempt from collecting Missouri sales tax because it has no physical nexus in Missouri?
A: No. The ruling states Applicant is not exempt from collecting and remitting sales tax for orders drop shipped within Missouri, regardless of the lack of physical nexus.

Q: Does staying under $100,000 in sales help Applicant avoid the tax?
A: The ruling doesn't grant any exemption based on that sales figure -- the Department's answer focuses entirely on where title to the goods transfers, not on a sales-volume threshold.

Q: Why does title transfer matter here?
A: Under 12 CSR 10-113.200(1), a sale of tangible personal property is subject to Missouri sales tax if title transfers in Missouri. Because Applicant's manufacturer delivers directly to Missouri customers, 12 CSR 10-113.200(3)(C) treats title as transferring in Missouri.

Q: How does title move in a drop-shipment sale, according to this ruling?
A: On delivery to the customer, title passes from the third-party supplier (the manufacturer) to the seller (Applicant), and then immediately from Applicant to the customer -- both transfers occurring in Missouri when delivery happens there.

Q: What is Applicant required to do going forward?
A: The ruling states Applicant should collect and remit sales tax on sales that are drop shipped by its supplier to customers in Missouri.

Q: Can another drop-shipping vendor rely on this ruling for its own sales?
A: Not automatically. This is a Missouri letter ruling, binding on the Department only with respect to the requesting Applicant, only for three years from its date, and only so long as the facts and underlying law remain unchanged. A different vendor should confirm its facts match and consult a tax professional before relying on this result.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8214

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated September 8, 2022.  Director's counsel attempted to contact Applicant for more information, but was unable to reach anyone.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is an out-of-state vendor who sells a manufacturer's products into Missouri. All products are drop shipped directly from the manufacturer to customers located within Missouri. Applicant does not have physical nexus in Missouri and their sales do not exceed $100,000.

ISSUE :

Is Applicant exempt from collecting and remitting sales taxes for orders drop shipped within Missouri since they do not have physical nexus and their sales do not exceed $100,000?

RESPONSE :

No. Applicant is not exempt from collecting and remitting sales tax for orders drop shipped within Missouri.

Section 144.020.1, RSMo, imposes a sales tax "upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state."

Regulation 12 CSR 10-113.200(1) provides, "a sale of tangible personal property is subject to sales tax if title to or ownership of the property transfers in Missouri..."

Regulation 12 CSR 10-113.200(3)(C) provides, in relevant part, "When an out-of-state seller delivers tangible personal property to a third-party common or contract carrier for delivery to Missouri, title transfers in Missouri."

A drop shipment is a sale in which the seller accepts an order from a customer, places the order with a third party supplier such as a manufacturer or wholesaler, and directs the third party supplier to deliver the item directly to the customer. On delivery of the order to the customer, title to the item sold passes from the third party supplier to the seller and then title to the item passes from the seller to the customer.

Applicant's products are drop shipped from Applicant's suppliers directly to Applicant's customers in Missouri. All of Applicant's sales to Missouri customers are subject to Missouri sales tax because title to the products always transfers to Applicant when the products are delivered in Missouri. Title of the products then passes within Missouri from Applicant to Applicant's customers. Therefore, Applicant should collect and remit sales tax on sales that are dropped shipped by Applicant's supplier to customers in Missouri.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford