Who owed South Carolina sales or use tax when a retailer had a manufacturer or distributor drop-ship goods to its customer?

Plain-English summary

South Carolina Revenue Ruling 98-8 divided tax responsibility in a three-party drop shipment according to the retailer's South Carolina status.

The manufacturer or distributor sold the product to the retailer for resale and shipped it directly to the retailer's South Carolina customer. The ruling treated that first transaction as a wholesale sale and the retailer's transaction with the customer as the retail sale.

Who owed or collected the tax

The ruling set out three results:

1. If the retailer was “engaged in business in this State,” the retailer owed South Carolina sales tax on the sale to its customer.
2. If the retailer was not engaged in business in South Carolina but had voluntarily obtained a retail license, it had to collect and remit use tax. The customer remained liable until the tax was paid, but the retailer's receipt showing payment relieved the customer.
3. If the retailer was neither engaged in business in South Carolina nor voluntarily licensed, the South Carolina customer owed the use tax.

The manufacturer or distributor making the direct shipment was not responsible for the sales or use tax on the retailer's customer sale under the facts described.

What “engaged in business” meant in the ruling

The ruling quoted Regulation 117-170 as including a seller that maintained, directly or indirectly or through a subsidiary, an office, distribution house, sales house, warehouse, or other place of business in South Carolina, or had an agent, salesperson, or solicitor operating in the state under its authority.

It also quoted the delivery rule for goods coming into South Carolina: when a seller was engaged in selling the property in the state and delivery occurred in the state, the sale was taxable even if the contract was accepted outside South Carolina or the goods were manufactured or procured elsewhere.

Historical nexus limitation

RR 98-8 said the drop shipment itself did not create nexus for a retailer that was not otherwise engaged in business under the quoted regulation and had not voluntarily licensed.

That conclusion must now be read with later guidance. RR 14-4 analyzed use of a South Carolina company to drop-ship merchandise as a nexus activity, and RR 18-14 added economic-nexus rules after South Dakota v. Wayfair. Current facts may therefore require collection even where the 1998 ruling placed use-tax liability on the customer.

Common questions

Q: Was the manufacturer or distributor responsible for tax on the customer's purchase?

A: No under the ruling's facts. Its sale to the retailer was a wholesale sale for resale.

Q: What if the retailer voluntarily held a South Carolina retail license?

A: It had to collect and remit use tax even if it was not otherwise engaged in business in the state.

Q: When was the customer directly liable?

A: When the retailer was not engaged in business in South Carolina and had not voluntarily obtained a retail license. A licensed retailer's receipt showing tax payment relieved the customer.

Q: Does RR 98-8 settle today's nexus question?

A: No. Later physical-presence and economic-nexus guidance must be applied to the retailer's current activities and sales.

Citations and references

• S.C. Code Ann. § 12-36-910 (sales tax)
• S.C. Code Ann. §§ 12-36-1310 and 12-36-1330 (use tax, collection, and purchaser liability)
• S.C. Code Ann. §§ 12-36-110 and 12-36-120 (retail and wholesale sales)
• S.C. Regulation 117-170 (business presence and delivery rules quoted in the ruling)
• SC Revenue Rulings #14-4 and #18-14 (later physical-presence and economic-nexus guidance)

Subject

Drop Shipments

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR98-8.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING # 98-8

SUBJECT:

Drop Shipments
(Sales and Use Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCES:

S. C. Code Ann. Section 12-36-910 (Supp. 1997)
S. C. Code Ann. Section 12-36-1310 (Supp. 1997)
S. C. Code Ann. Section 12-36-1330 (Supp. 1997)
S. C. Code Ann. Section 12-36-110 (Supp. 1997)
S. C. Code Ann. Section 12-37-120 (Supp. 1997)
SC Regulation 117-170

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1997)
SC Revenue Procedure #97-8

SCOPE:

A Revenue Ruling is the Department of Revenue's official advisory
opinion of how laws administered by the Department are to be applied to
a specific issue or a specific set of facts, and is provided as guidance for
all persons or a particular group. It is valid and remains in effect until
superseded or modified by a change in the statute or regulations or a
subsequent court decision, Revenue Ruling or Revenue Procedure.

Question:
Who is liable for the tax when tangible personal property is drop shipped, at the request of the
retailer, to the retailer’s South Carolina customer by a manufacturer or distributor?
Conclusion:
When tangible personal property is drop shipped, at the request of the retailer, to the retailer’s
South Carolina customer by a manufacturer or distributor, the liability for the tax is as follows:
(1)

If the retailer is “engaged in business in this State,” then the retailer is liable for the
sales tax with respect to the sale of property drop shipped to his customer in this state.

(2)

If the retailer is not “engaged in business in this State” but has voluntarily obtained a
retail license from the department, then the retailer must collect and remit the use tax to
the State. Please note that while the retailer must collect and remit the use tax to the

1

State, the purchaser remains liable for the use tax until the tax is paid. However, a
receipt from the retailer showing the use tax was paid to the retailer by the purchaser is
sufficient to relieve the purchaser from liability for the use tax.
(3)

If the retailer is not “engaged in business in this State” and has not voluntarily obtained
a retail license from the department, then the liability for the use tax rests with the
retailer’s customer (the purchaser).

See SC Regulation 117-170 on page 3 of this document for a definition of what constitutes being
“engaged in business in this State.”
Note: Based on the above, the manufacturer or distributor shipping a product directly to the
retailer’s South Carolina customer via the drop shipment method described in this document is
not responsible for the sales and use tax. In addition, the drop shipment by the manufacturer or
distributor does not create nexus for the retailer if such retailer is not “engaged in business in
this State” as that term is defined in SC Regulation 117-170 and has not voluntarily obtained a
retail license from the department.
Facts:
A retailer may contract with a manufacturer (or distributor) to ship product directly to the
retailer’s South Carolina customer. The manufacturer (or distributor) will bill the retailer for the
product and the retailer will in turn bill its customer. Such an arrangement is commonly referred
to as a “drop shipment.”
Discussion:
Code Section 12-36-910 imposes "a sales tax, equal to five percent of gross proceeds of sales,
upon every person engaged ... within this State in the business of selling tangible personal
property at retail." (Emphasis added.)
Code Section 12-36-1310 imposes “a use tax ... on the storage, use, or other consumption in this
State of tangible personal property purchased at retail for storage, use, or other consumption in
this State, at the rate of five percent of the sales price of the property.”
The liability for the use tax rests with the user or consumer of the tangible personal property (the
purchaser); however, a retailer engaged in business in South Carolina has a duty to collect and
remit the use tax to the State. In addition, a receipt from the retailer showing the use tax was
paid to the retailer by the purchaser is sufficient to relieve the purchaser from liability for the use
tax. See Code Section 12-36-1330.
Therefore, in order for either the sales tax or the use tax to apply, there must be a retail sale.
Code Section 12-36-110 defines the terms “retail sale” and “sale at retail” to mean, in part:
all sales of tangible personal property except those defined as wholesale sales.

2

Code Section 12-36-120 defines the terms “wholesale sale” and “sale at wholesale” to mean, in
part, the sale of:
(1) tangible personal property to licensed retail merchants, jobbers, dealers, or
wholesalers for resale, and do not include sales to users or consumers not for resale.
Finally, with respect to goods shipped into this state, SC Regulation 117-170 states in part:
(1) Goods coming into this State. When tangible personal property is purchased for use
or consumption in this State and (1) the seller is engaged in the business of selling such
tangible personal property in this State for use or consumption and (2) delivery is made
in this State, such sale is subject to the sales tax. Such sale is taxable regardless of the
fact that the purchaser’s order may specify that the goods are to be manufactured or
procured by the seller at a specified point outside this State and shipped directly to the
purchaser from the point of origin.
If the conditions above are met it is immaterial (1) that the contract of sale is closed
by acceptance outside the State or (2) that the contract is made before the property
is brought into this State. Delivery is held to have taken place in this State (1) when
physical possession of the tangible personal property is actually transferred to the
buyer within this State or (2) when the tangible personal property is placed in the
mails at a point outside this State directed to the buyer in this State or placed on
board a carrier at a point outside this State (FOB or otherwise) and directed to the
buyer in this State.
Engaging in business in this State shall include any of the following methods of
transacting business: maintaining directly, indirectly, or through a subsidiary, an office,
distribution house, sales house, warehouse or other place of business or by having an
agent, salesman or solicitor operating within the State under the authority of the seller or
its subsidiary.
As such, when a manufacturer or distributor, at the request of a retailer, drop ships its product in
South Carolina and the manufacturer or distributor bills the retailer for the product and the
retailer then bills its customer for the product that was drop shipped, the manufacturer or
distributor is making a wholesale sale and the retailer is making a retail sale. Therefore, the
manufacturer or distributor is not liable for the sales tax or use tax.
If the retailer is “engaged in business in this State,” then the retailer is liable for the sales tax
with respect to the sale of property drop shipped to his customer in this state.
If the retailer is not “engaged in business in this State” but has voluntarily obtained a retail
license from the department, then the retailer must collect and remit the use tax to the State.
Please note that while the retailer must collect and remit the use tax to the State, the purchaser
remains liable for the use tax until such tax is paid. However, a receipt from the retailer showing
the use tax was paid to the retailer by the purchaser is sufficient to relieve the purchaser from
liability for the use tax.

3

If the retailer is not “engaged in business in this State” and has not voluntarily obtained a retail
license from the department, then the liability for the use tax rests with the retailer’s customer
(the purchaser).
Finally, the manufacturer or distributor shipping a product directly to the retailer’s South
Carolina customer via the drop shipment method described in this document is not responsible
for the sales and use tax. In addition, the drop shipment by the manufacturer or distributor does
not create nexus for the retailer if such retailer is not “engaged in business in this State” as that
term is defined in SC Regulation 117-170 and has not voluntarily obtained a retail license from
the department.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank, III

March 24
, 1998
Columbia, South Carolina

4