If my wholesaler drop ships my products directly to my customers in Missouri, do I have to collect and remit Missouri sales tax?

Subject

Taxability of Third-Party Drop Shipment

Plain-English summary

The Missouri Department of Revenue ruled that an out-of-state seller of print and promotional items must collect and remit Missouri sales tax on sales that are drop shipped to its customers in Missouri -- even though the seller itself has no warehouse, store, or other physical presence in the state and its Missouri sales total less than $100,000 a year.

Applicant takes customer print designs, sends them to its wholesaler, and the wholesaler prints the finished items and ships them directly to the customer's location, including locations in Missouri. Applicant asked whether it should be collecting and remitting sales tax on these Missouri sales.

The Department said yes. In a drop shipment, title to the item legally passes twice at essentially the same moment of delivery: first from the third-party supplier (the wholesaler) to the seller (Applicant), and then immediately from the seller to the customer. Missouri's regulations tax a sale of tangible personal property if title transfers in Missouri, and specifically say that when an out-of-state seller has property delivered to a Missouri customer via a third-party carrier, title transfers in Missouri. Because both legs of the title transfer happen in Missouri when the wholesaler delivers to Applicant's Missouri customers, Applicant's sales are subject to Missouri sales tax, and Applicant must collect and remit it.

What this means for you

Sellers who use drop-shipment fulfillment

If you sell into Missouri and have a third-party supplier (a manufacturer or wholesaler) ship products directly to your Missouri customers, this ruling says those sales are taxable in Missouri because title to the goods transfers there -- first to you, then to your customer -- at the moment of delivery. Being out-of-state yourself, having no other Missouri presence, and having a small dollar amount of Missouri sales did not change that outcome here. Structuring fulfillment as a drop shipment does not avoid the obligation to collect and remit Missouri sales tax on those sales.

Manufacturers and wholesalers who fulfill drop-shipment orders for others

This ruling is about the seller's (Applicant's) own collection obligation, not the wholesaler's. But the underlying title-transfer analysis matters for anyone in the supply chain: under 12 CSR 10-113.200(3)(C), when an out-of-state seller has tangible personal property delivered to Missouri via a third-party carrier, title transfers in Missouri. If you are the manufacturer or wholesaler doing the drop shipping, understanding this rule helps you anticipate that your customer (the seller) may have a Missouri collection obligation on the sale you are fulfilling.

Accountants and tax professionals

The key analytical move here is applying Missouri's title-transfer sourcing rule (12 CSR 10-113.200(1) and (3)(C)) to the two-step title transfer inherent in any drop shipment: supplier-to-seller, then seller-to-customer. Because both transfers occur upon delivery in Missouri, the sale is sourced to Missouri regardless of where the seller or the supplier is physically located, and regardless of separate nexus questions the seller might otherwise raise. This ruling did not need to reach a broader economic-nexus analysis because title-transfer sourcing alone was sufficient to establish taxability.

Common questions

Q: Does it matter that Applicant is an out-of-state seller with no Missouri warehouse or store?
A: No. The ruling's reasoning turns on where title to the product transfers, not on where the seller is physically located. Because delivery -- and therefore title transfer -- happens in Missouri, the sale is taxable there.

Q: Does it matter that Applicant's Missouri sales are less than $100,000 a year?
A: The ruling doesn't treat that dollar figure as changing the outcome. The Department's conclusion rests entirely on the title-transfer analysis for drop shipments, not on a sales-volume threshold.

Q: Why does title transfer in Missouri twice in a drop shipment?
A: In a drop shipment, the seller accepts an order, places it with a third-party supplier, and has the supplier ship directly to the customer. Legally, title to the item still passes from the supplier to the seller, and then from the seller to the customer, even though the physical goods move directly from supplier to customer. Both of those transfers happen at delivery in Missouri, which is what makes the sale taxable there.

Q: Can another business rely on this ruling for its own drop-shipment sales?
A: Not automatically. This is a Missouri letter ruling, binding on the Department only with respect to the Applicant who requested it, only for three years from its date, and only so long as the facts and law remain unchanged. Any change in the facts as presented would make the ruling inapplicable, and other businesses should confirm their own facts match before relying on it.

Q: Does this ruling address whether Applicant has Missouri nexus in the first place?
A: Applicant asserted it otherwise had no Missouri nexus except as might be established under these facts, but the Department's response did not need to separately resolve a general nexus question -- it resolved the issue on the narrower ground that title to the drop-shipped goods transfers in Missouri, which alone makes the sale taxable there.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8232

Original ruling text

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 communication of January 9, 2023.

The facts as presented in your letter ruling request, as well as communications with you, are summarized as follows:

Applicant sells print and promotional items.  The Applicant operates a business whereby customer designs are made printable by the Applicant, who then sends those designs to the Applicant's wholesaler.  The Applicant's wholesaler prints and drop ships finished items at customer locations (including those in Missouri).

The Applicant asserts that it is an out-of-state vendor who does not otherwise have nexus in the state of Missouri [except as may be established under these facts].  The Applicant sells a manufacturer's products into Missouri. All products are drop shipped directly from a manufacturer to the Applicant's customers located within Missouri. The Applicant's sales in Missouri total less than one-hundred-thousand dollars annually.

ISSUE :

Should Applicant be collecting and remitting sales taxes on Missouri sales?

RESPONSE :

Yes.  Applicant should be collecting and remitting sales taxes on Missouri sales.

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 Nathan Jefferson, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford

WW:CRF:NJ:km