Does an out-of-state printer of clinical research materials have to collect Tennessee use tax on products it warehouses out of state and ships to Tennessee pharmaceutical customers months or years after the sale, and does that extend to shipping and handling charges?

Subject

Use tax collection obligations for an out-of-state seller warehousing and shipping products to Tennessee customers over time.

Plain-English summary

The Tennessee Department of Revenue ruled on an out-of-state printer's obligation to collect Tennessee use tax on clinical research materials it prints, warehouses out of state, and ships to Tennessee pharmaceutical customers — sometimes years after the sale.

Use tax applies to both the initial shipment and every later shipment, assuming the taxpayer has Tennessee nexus (for example, if it sends salespeople into Tennessee to solicit customers, per Scripto, Inc. v. Carson). Even though legal title to the printed materials passes to the customer out of state, at the seller's loading dock, once the order is completed and billed — meaning the seller's home state gets first crack at taxing the sale — Tennessee still taxes the item when it's later brought into Tennessee for use, consumption, or storage-for-use. The taxpayer gets credit against its Tennessee use tax liability for any sales tax already properly paid to its home state. Because these clinical-trial materials are typically printed in one lot and then stored indefinitely (sometimes for years) awaiting the customer's direction on when and where to ship, tax on each subsequent shipment is collected at the time that specific shipment to Tennessee is actually requested and billed — not all at once when the original order was placed.

Shipping charges and handling fees are treated differently. Because title passes at the point of origin (the seller's own loading dock or warehouse) rather than at the Tennessee destination, separately stated shipping/freight charges are not taxable under Tennessee's freight-charge rule (Rule 71). But there's no equivalent carve-out for handling fees — those stay taxable regardless of how title passes. Critically, if the shipping and handling charges are not separated on the invoice, the whole combined charge becomes taxable, following the same "can't split an inseparable charge" principle from Saverio v. Carson.

What this means for you

Out-of-state sellers who warehouse goods for later delivery

Don't assume that a single point-of-sale transaction (with title passing at your out-of-state facility) settles your Tennessee tax exposure once and for all. If you continue to hold inventory and ship it to Tennessee customers over an extended period — sometimes years, as with these clinical trial materials — each individual shipment into Tennessee can trigger its own separate use tax collection obligation, timed to when that shipment is actually requested and billed. Confirm your Tennessee nexus status (sales solicitation activity in the state is the key trigger) before assuming you're outside Tennessee's reach.

Accountants and tax professionals

This ruling is a clean worked example of the nexus analysis from Pearle Health Services v. Taylor and Scripto, Inc. v. Carson, paired with the point-of-title-passage freight rule in TENN. COMP. R. & REGS. 1320-5-1-.71 and the anti-splitting doctrine from Saverio v. Carson applied specifically to shipping-vs-handling itemization. When advising a client with a similar "print now, ship later" or long-term-storage delivery model, walk through nexus first, then the timing rule for use tax on staggered shipments, then the shipping/handling itemization question separately — each turns on a different rule.

Common questions

Q: If title to goods passes outside Tennessee, does that mean Tennessee use tax never applies?
A: No. Where title passes only affects which state gets first right of taxation (with a credit against Tennessee tax for tax already paid elsewhere) — Tennessee still imposes use tax once the goods are actually brought into the state for use, consumption, or storage for subsequent use.

Q: When is use tax owed on goods that sit in a warehouse for years before being shipped to Tennessee?
A: At the time each specific shipment to Tennessee is requested and billed for shipping/handling — not all at once when the original sale occurred.

Q: Are shipping charges taxable in Tennessee?
A: Not if title to the goods passes at the point of origin and the shipping charge is stated separately from any handling fee — but handling fees are taxable regardless, and if shipping and handling aren't separated, the whole combined charge becomes taxable.

Q: Does an out-of-state seller automatically have to collect Tennessee use tax just by selling to Tennessee customers?
A: No — only if it has sufficient nexus with Tennessee, such as sending sales representatives into the state to solicit business, or other dealer-triggering activity under Tenn. Code Ann. § 67-6-102(12).

Q: Does this ruling bind the Department for other out-of-state sellers?
A: No. This is a Revenue Ruling — advisory only and not binding on the Department, even for the taxpayer who requested it.

Citations and references

Statutes, rules, and cases:

• Tenn. Code Ann. § 67-6-201 (privilege of selling/using tangible personal property in Tennessee)
• Tenn. Code Ann. § 67-6-102(12) (definition of "dealer," incl. solicitation-based nexus)
• Tenn. Code Ann. § 67-6-501(a) (dealer liability for tax on sales for use in Tennessee, whether made in or outside the state)
• Tenn. Code Ann. § 67-6-507(a) (credit against Tennessee tax for tax already paid to another state)
• Tenn. Code Ann. § 67-6-322 (exemption for certain not-for-profit purchasers, not fully addressed on these facts)
• TENN. COMP. R. & REGS. 1320-5-1-.71 ("Rule 71") (freight/transportation charges untaxed only if title passes at origin)
• Texas Gas Transmission Corp. v. Benson, 444 S.W.2d 137 (Tenn. 1969) (use tax triggered when goods brought into Tennessee for use/storage)
• Pearle Health Services v. Taylor, 799 S.W.2d 655 (Tenn. 1990); Scripto, Inc. v. Carson, 362 U.S. 207 (1960) (nexus through in-state sales solicitation)
• Saverio v. Carson, 208 S.W.2d 1018 (Tenn. 1948) (inseparable bundled charges can't exclude the nontaxable portion)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/07-13.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING 07-13

WARNING

Revenue rulings are not binding on the Department. This presentation of the ruling
in a redacted form is information only. Rulings are made in response to particular
facts presented and are not intended necessarily as statements of Departmental
policy.

SUBJECT
Obligation of an out-of-state Taxpayer to collect use tax from a Tennessee customer.
SCOPE

Revenue Rulings are statements regarding the substantive application of law and
statements of procedure that affect the rights and duties of taxpayers and other members
of the public. Revenue rulings are advisory in nature and are not binding on the
Department.

FACTS

The Retailer (hereinafter the “Taxpayer”), a C Corporation, is organized and located
outside the State of Tennessee. The Taxpayer’s business activity within the state of
Tennessee consists of solicitation of sales of printed clinical research materials to for-
profit and not-for-profit pharmaceutical entities (end users) to be utilized in drug studies,
clinical trials and other informational uses. The clinical research materials can be
delivered in the form of loose-leaf pages, folders, or threefold pamphlets. The
Taxpayer’s customers provide text information and a description of the required layout or
format for the clinical research materials to be printed. The Taxpayer subsequently
provides the composition, printing service including supplies, binding if necessary, and
any required packaging.

Customer orders are in almost all instances printed in one lot instead of on an “as needed”
basis. Upon completing the order, the customer is billed for the entire contract price
regardless of whether the product is immediately shipped or subsequently stored in the
Taxpayer’s warehouse. Due to the nature of clinical research and drug studies, the
customer is not able to immediately determine when or where the product stored in the
Taxpayer’s warehouse may be required to be shipped.

Any customer order shipped in one lot (no storage) will be shipped Free On Board
(F.O.B.) the Taxpayer’s loading dock. Any order where the product is not immediately
shipped will be stored in the Taxpayer’s climate controlled warehouse outside of

Tennessee at no additional charge. During the period of storage, the Taxpayer will insure
the product against damage or loss. Legal title, however, passes to the customer once the
order has been completed and the customer has been billed. Since legal title has passed
to the customer, any product stored by the Taxpayer is not inventory on the books of the
Taxpayer. The period of storage may range from several days to several years with
subsequent shipments occurring at the direction of the customer. The Taxpayer’s
distribution policy for stored products requires a formal written release from the customer
with the handling fees and the shipping charges separately itemized and billed for any
product shipped. The customer will only be charged for shipping and/or handling on
shipments of the product subsequent to the initial shipment. Shipments are via common
carrier as arranged by the Taxpayer. Any products in the warehouse, without activity for
an extended period of time, may be destroyed upon confirmation from the customer.

ISSUES

1. Is the Taxpayer required to collect and remit Tennessee sales or use tax on the
   initial shipment of product sold to the Tennessee end user?

2. Is the Taxpayer required to collect and remit sales or use tax on the subsequent
   shipments of research materials, as it is not known at the initial time of sale when,
   where, or to whom the research materials will be delivered?

3. Is the Taxpayer required to collect and remit Tennessee sales tax on the shipping
   and handling charges for either the initial shipment or subsequent shipments
   which may occur up to several years after the initial sales transaction?

RULINGS

1. The Taxpayer is required to collect and remit use tax on any shipments sent to a
   customer in Tennessee.’ However, any sales tax legally paid to the Taxpayer’s
   home state will be credited against any Tennessee tax liability.

2. The Taxpayer is required to collect and remit use tax on any subsequent shipments
   of research materials to customers in Tennessee. The tax for each set of materials
   delivered to Tennessee should be collected and remitted at the time when the
   customer requests shipment to Tennessee and when the Taxpayer charges the
   customer for shipping and handling for the shipment to Tennessee.

3. The Taxpayer is not required to collect and remit Tennessee sales tax on the
   shipping charges for any of the shipments as long as the shipping charges are
   stated separately from any handling fees. The Taxpayer is required to collect and
   remit Tennessee sales tax on any handling fees.

' Sales to certain not-for-profit entities are exempt if all requirements of Tenn. Code Ann. § 67-6-322 are
met.

ANALYSIS

1. The Taxpayer is required to collect and remit use tax on any shipments sent to a
   customer in Tennessee. However, any sales tax legally paid to the Taxpayer’s
   home state will be credited against any Tennessee tax liability.

The Retailers’ Sales Tax Act imposes tax on the privilege of selling goods at retail in
Tennessee or purchasing goods out of state for use in Tennessee. Tenn. Code Ann. § 67-
6-201. If goods are brought within the State of Tennessee for sale at retail, use,
consumption, distribution or storage for subsequent use, they are subject to the taxing
power of the State. Texas Gas Transmission Corp. v. Benson, 444 S.W.2d 137, 139
(Tenn. 1969).

In order for the Taxpayer, an out-of-state seller, to be required to collect and remit a use
tax as a dealer, there must be a sufficient nexus between the Taxpayer and the State of
Tennessee. Pearle Health Services v. Taylor, 799 S.W.2d 655 (Tenn. 1990). The
Taxpayer has represented that it solicits sales in Tennessee. More details are needed to
determine if the solicitation of sales is such as to give the Taxpayer nexus with
Tennessee. For example, the Taxpayer will have nexus with Tennessee if it sends sales
people, either employees or independent contractors, to Tennessee for the purpose of
attracting, soliciting and obtaining Tennessee customers. See Scripto, Inc. v. Carson, 362
U.S. 207, 80 S.Ct. 619 (1960) (holding that a Georgia company had nexus with Florida
because it sent brokers to Florida with advertising material who were actively engaged in
Florida for the purpose of attracting, soliciting and obtaining Florida customers).

If the Taxpayer has nexus with Tennessee, it will qualify as a dealer under the categories
defined below in Tenn. Code Ann. § 67-6-102(12). A “dealer” means every person, as
used in this chapter who:

(1) Has any representative, agent, salesperson, canvasser or solicitor
operating in this state, or any person who serves in such capacity,
for the purpose of making sales or the taking of orders for sales,
irrespective of whether such representative, agent, salesperson,
canvasser or solicitor is located here permanently or temporarily,
and irrespective of whether an established place of business is
maintained in this state;

(J) Engages in the regular or systematic solicitation of a consumer
market in this state by the distribution of catalogs, periodicals,
advertising fliers, or other advertising, or by means of print, radio
or television media, by telegraphy, telephone, computer data base,
cable, optic, microwave, or other communication system.

According to Tenn. Code Ann. § 67-6-501(a), a dealer is liable for collecting tax for any
sales it makes either inside or outside of Tennessee for use in Tennessee:

Every dealer making sales, whether within or outside the state, of tangible
personal property, for distribution, storage, use, or other consumption in
the state, or furnishing any of the things or services taxable under this
chapter, is liable for the tax imposed by this chapter.

According to the facts provided by the Taxpayer, title for the product passes at the
Taxpayer’s location once the order has been completed and billed to the customer,
therefore, the Taxpayer’s home state has the first right of taxation. Any tax paid in that
state will be credited against the amount of tax owed to Tennessee. Tenn. Code Ann. §
67-6-507(a) states that if tax has already been paid on an item of tangible personal
property and the amount of tax is less than what would have been paid in Tennessee if the
item had been purchased in Tennessee, then the dealer must pay the difference between
the amount paid and the amount owed.

Assuming the Taxpayer has nexus with Tennessee, the Taxpayer, as a dealer, is liable for
collecting use tax on the initial shipment of goods to Tennessee as well as on any
subsequent shipments to Tennessee. The Taxpayer, however, can credit all or a portion
of sales taxes paid to the Taxpayer’s own state against any Tennessee use tax liability.

2. The Taxpayer is required to collect and remit use tax on any subsequent shipments
   of research materials to customers in Tennessee. The tax for each set of materials
   delivered to Tennessee should be collected and remitted at the time when the
   customer requests shipment to Tennessee and when the Taxpayer charges the
   customer for shipping and handling for the shipment to Tennessee.

A Tennessee tax liability occurs when the goods are brought into Tennessee for sale at
retail, use, consumption, distribution or storage for subsequent use. Texas Gas
Transmission Corp. v. Benson, 444 S.W.2d 137, 139 (Tenn. 1969). The Taxpayer is
required to collect and remit use tax on any subsequent shipments of research materials to
customers in Tennessee based on the sales price of the items to be shipped. Pearle
Health Services v. Taylor, 799 S.W.2d 655 (Tenn. 1990). The tax for each set of
materials delivered to Tennessee should be collected and remitted at the time when the
customer requests shipment to Tennessee and when the Taxpayer charges the customer
for shipping and handling for the shipment to Tennessee. The Taxpayer can credit all or
a portion of sales taxes paid to the Taxpayer’s own state against any Tennessee use tax
liability.

3. The Taxpayer is not required to collect and remit Tennessee sales tax on the
   shipping charges for any of the shipments as long as the shipping charges are
   stated separately from any handling fees. The Taxpayer is required to collect and
   remit Tennessee sales tax on any handling fees.

Where title to the property being transported passes to the vendee at the point of origin,
the freight or other transportation charges are not subject to the sales or use tax.”

“Legislation related to the Streamlined Sales and Use Tax Agreement, effective July 1, 2007, may result in
changes regarding the application of sales and use tax sales of certain items of tangible personal property.

TENN. COMP. R. & REGS. 1320-5-1-.71 (“Rule 71”) states:

Freight, delivery, or other like transportation charges are subject to the
Sales and Use Tax if title to the property being transported passes to the
vendee at the destination point. Where title to the property being
transported passes to the vendee at the point of origin, the freight or
other transportation charges are not subject to the Sales or Use Tax.
It is immaterial whether the vendor or vendee actually pays for any
charges made for transportation, whether the charges are actually paid by
one for the other, or whether a credit or allowance is made or given for
such charges. In cases, where a vendor makes a separate charge for
delivering tangible personal property in his own vehicle, or makes
arrangements for delivering tangible personal property, other than by a
common carrier, the delivery charges shall be considered a part of the
selling price subject to the Sales or Use Tax. (Emphasis added).

The shipping charges are not subject to sales or use tax because title to the goods passes
at the Taxpayer’s loading dock, the point of origin. Neither the statutes nor the
regulations provide a similar exemption for handling fees. In Saverio v. Carson, 208
S.W.2d 1018 (Tenn. 1948), the Tennessee Supreme Court addressed a single charge
covering multiple items, in which some items were taxable and some were non-taxable.
Specifically, the case involved a laundry operator who rented and laundered diapers. One
part of the business was laundering diapers owned by the customers; the other part was
renting out laundered diapers owned by the laundry operator. With regard to the rented
diapers, the laundry operator argued that she should not be subject to tax on the part of
the rental fee that covered the laundering service because a laundry service was exempt
from tax. However, the Court found that the rental charge was not divisible and the law
required that the tax be based on the gross proceeds from the rental; thus, the exclusion of
the non-taxable items from the tax base was not permitted. Similarly under the facts at
issue, if the shipping charges and handling fees are not separated, both will be subject to
tax. If the shipping charges and handling fees are separated, only the handling fees will
be subject to Tennessee sales tax.

David A. Gerregano
General Counsel

Approved: Reagan Farr
Commissioner of Revenue

Date: 05/03/07

The Department of Revenue encourages you to visit our website at www.tennessee.gov/revenue for
updates.