Must an out-of-state supplier collect New York tax on goods it drop-ships to a New York fabricator for a customer in a third state?

Plain-English summary

Teddy & Arthur Edelman Ltd., a Connecticut leather supplier registered to collect New York sales tax, described a three-state drop-shipment: a customer in a third state (say California) orders leather, asks to be billed in California, but has the leather shipped to a New York upholsterer, who uses it to make chairs and then ships the finished chairs back to the California customer. Edelman asked whether it must collect New York tax on the leather.

The Department said yes — collect it, with a refund available downstream:

• Delivery in New York = taxable in New York. Under Regulation § 526.7(e), a sale is taxable where the property is delivered or where possession passes to the purchaser or the purchaser's designee. Here the leather is delivered to the New York upholsterer (the customer's designee), so the sale is a New York sale, taxable under § 1105(a). (The regulation's Example 5 uses the same fact pattern — woolens shipped to a New York dressmaker are taxed on delivery in New York.)
• Collect unless you get a certificate. Under § 1132(c), all receipts are presumed taxable until the contrary is shown. Unless Edelman takes a New York resale certificate or other exemption document from the customer within 90 days of delivery, the sale is deemed a taxable retail sale, and on audit the burden is on Edelman to prove the sale was for resale (Steelcase, Inc., TSB-H-87(219)S). Tax is computed on the price the customer pays Edelman, at the combined state/local rate where the goods are delivered.
• The customer's refund route. Even if tax is collected, under § 1119(a)(4) the customer may apply for a refund or credit, because the property was not purchased for resale, was used in New York only to fabricate/assemble it with other property, and was then shipped outside New York for use outside New York.

What this means for you

Drop-shipping into New York can create a New York taxable sale

If you're an out-of-state seller and you ship goods to a New York location at your customer's direction, the delivery point — New York — controls, even when your customer is elsewhere and you bill them out of state. That makes it a New York taxable sale, and as a registered vendor you're expected to collect.

A resale certificate is your protection — get it within 90 days

The way out is documentation. If the customer is buying for resale (or is otherwise exempt), take a New York resale certificate or exemption document within 90 days of delivery. Without it, the § 1132(c) presumption makes the sale taxable and puts the burden of proof on you if audited. Don't rely on the customer's out-of-state status alone.

The § 1119 fabricate-and-ship-out refund

There's relief on the buyer's side: § 1119(a)(4) allows a refund where the goods aren't for resale but are used in New York solely to fabricate, assemble, process, print, or imprint, and are then shipped out of state for use out of state. So a customer who gets charged New York tax on drop-shipped inputs that leave the state as finished goods can recover it — but it's a refund claim, not an up-front exemption.

Common questions

Q: Does the Connecticut supplier have to collect New York tax?
A: Yes. Because the leather is delivered to a New York fabricator, the sale is taxable in New York under § 1105(a) and § 526.7(e), unless a resale/exemption certificate is obtained.

Q: The customer is in California and billed there — doesn't that make it a California sale?
A: No. The place of delivery governs, and delivery is to the New York upholsterer (the customer's designee), so it's a New York sale.

Q: How does the supplier avoid collecting tax?
A: By taking a New York resale certificate or other exemption document from the customer within 90 days of delivery; otherwise the sale is presumed taxable and the supplier bears the burden of proof.

Q: Can the tax be recovered?
A: Yes. Under § 1119(a)(4), the customer can apply for a refund because the leather is used only to fabricate/assemble chairs that are then shipped out of state for use out of state.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1105(a) (tax on receipts from every retail sale of tangible personal property)
• Tax Law § 1132(c) (presumption that receipts are taxable; 90-day resale/exemption certificate rule)
• Tax Law § 1119(a)(4) (refund/credit for property used only to fabricate, assemble, process, print, or imprint and then shipped out of state for use out of state)
• Sales and Use Tax Regulations § 526.7(e) (transfer of possession; sale taxable where property is delivered; Example 5, woolens to a New York dressmaker)
• Steelcase, Inc., Dec. St. Tax Comm., July 3, 1988, TSB-H-87(219)S (burden of proving resale is on the vendor)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_14s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-92 (14)S
Sales Tax
February 26, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK

COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S911127A

On November 27, 1991, a Petition for Advisory Opinion was received from Teddy & Arthur
Edelman Ltd., 28 Hawleyville Road, PO Box 110, Hawleyville, Connecticut 06440-0110.
The issue raised by Petitioner, Teddy & Arthur Edelman Ltd., is whether Petitioner must
collect New York State and local sales and use taxes on leather ordered by a non New York customer
and shipped to New York for use in assembly of chairs which are ultimately shipped outside of New
York.
Petitioner received a Certificate of Authority from the Department of Taxation and Finance
and collects and remits New York sales tax on sales made into New York. Petitioner has received
orders for leather from a customer in a third state, e.g. California, with instructions that the material
be billed to the customer in California but that the leather be shipped to an upholsterer in New York,
who will use the leather in the manufacture of chairs.
Petitioner will ship the leather to the New York upholsterer by common carrier, usually UPS,
and will bill the California customer for the leather. The New York upholsterer will assemble the
chair, using the leather provided by Petitioner, will ship the chair to the California customer and bill
the California customer for his services.
Section 1105(a) of the Tax Law imposes a tax upon "The receipts from every retail sale of
tangible personal property. . ."
Section 526.7(e) of the Sales and Use Tax Regulations provides, in part, as follows:
(e) Transfer of possession. (1) Except as otherwise provided in paragraph
three of this subdivision, a sale is taxable at the place where the tangible personal
property or service is delivered or the point at which possession is transferred by the
vendor to the purchaser or his designee.
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Example 5: A New Jersey resident purchases woolens from
a New York State supplier and requests that the woolens be shipped
to a New York State dressmaker to produce wearing apparel not
intended for resale. The dressmaker will ship the completed apparel
to New Jersey. Since the delivery of the woolens occurred in New
York State the woolens are subject to tax. However, the charge for
producing the wearing apparel is not subject to tax because delivery
of the wearing apparel takes place in New Jersey.

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TSB-A-92 (14)S
Sales Tax
February 26, 1992

(2) Except as otherwise provided in paragraph three of this subdivision, a sale
of tangible personal property, in which the title to the property passes in New York
State, but in which delivery occurs outside of New York State, is not subject to tax.
Section 1132(c) of the Tax Law provides in pertinent part, as follows:
For the purpose of the proper administration of this article and to prevent
evasion of the tax hereby imposed, it shall be presumed that all receipts for property
or services of any type mentioned in subdivisions (a), (b), (c) and (d) of section
eleven hundred five. . . are subject to tax until the contrary is established, and the
burden of proving that any receipt, amusement charge or rent is not taxable hereunder
shall be upon the person required to collect tax or the customer. Except as provided
in subdivision (h) of this section, unless (1) a vendor, not later than ninety days after
delivery of the property or the rendition of the service, shall have taken from the
purchaser a certificate in such form as the tax commission may prescribe, signed by
the purchaser and setting forth his name and address and, except as otherwise
provided by regulation of the tax commission, the number of his registration
certificate, together with such other information as said commissioner may require,
to the effect that the property or service as purchased for resale or for some use by
reason of which the sale is exempt from tax under the provisions of section eleven
hundred fifteen, and, where the certificate requires the inclusion of the purchaser's
registration certificate number or other identification number required by regulations
of the tax commission, that the purchaser's certificate of authority has not been
suspended or revoked and has not expired as provided in section eleven hundred
thirty-four, or (2) the purchaser, not later than ninety days after delivery of the
property or the rendition of the service, furnishes to the vendor: any affidavit,
statement or additional evidence, documentary or otherwise, which the tax
commission may require demonstrating that the purchaser is an exempt organization
described in section eleven hundred sixteen, the sale shall be deemed a taxable sale
at retail.
Section 1119 of the Tax Law provides, in part, as follows:
Sec. 1119. Refunds or credits based on proof of certain uses. --(a) Subject to
the conditions and limitations provided for herein, a refund or credit shall be allowed
for a tax paid pursuant to subdivision (a) of section eleven hundred five. . .
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-3­
TSB-A-92 (14)S
Sales Tax
February 26, 1992

(4) on the sale or use within this state of tangible personal property, not
purchased for resale, if the use of such property in this state is restricted to fabricating
such property (including incorporating it into or assembling it with other tangible
personal property), processing, printing or imprinting such property and such
property is then shipped to a point outside this state for use outside this state,
Therefore in accordance with the provisions of Sections 1105(a) and 1132(c) of the Tax Law
and Section 526.7(e) of the Sales and Use Tax Regulations, Petitioner should collect sales tax from
a customer located outside of New York State when Petitioner ships the goods to a third party
located in New York State pursuant to the request of such customer unless the Petitioner has
received a New York resale certificate or other appropriate exemption document from the customer.
The purchase price paid by the customer to the Petitioner and the combined state and local tax rate
in effect in the locality in which the goods are delivered should be used to compute the tax.
In the event customers purchases were for resale and the Petitioner does not obtain such
documentation, then upon audit the burden of proof shall be upon the Petitioner to prove that its
customer purchased the merchandise at issue for resale or that the sale was otherwise exempt from
the imposition of sales tax. Steelcase, Inc., Dec St Tax Comm, July 3, 1988, TSB-H-87(219)S.
It should be noted, however, that if Petitioner has collected from its customers sales tax in
accordance with Sections 1105(a) and 1132(c) of the Tax Law, pursuant to Section 1119 of the Tax
Law the customer may apply for a refund of the taxes paid.

DATED: February 26, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.