When a Texas-permitted seller (Company A) drop-ships an item to a Texas customer (Company C) on behalf of a reseller (Company B), who is responsible for collecting the Texas use tax?

Plain-English summary

A Texas-permitted seller ("Company A") asked about a three-party drop-shipment: Company B buys an item from Company A for resale, and asks Company A to ship the item directly to Company B's customer ("Company C"), who is located in Texas. Company A wanted to know who owes and who must collect the Texas use tax.

The Comptroller's answer:

• Texas use tax is due on the transaction, but Company A (the drop-shipping seller) does not have to collect it, as long as Company A gets a properly completed Texas resale certificate from Company B.
• Company B must collect the tax instead if Company B is "engaged in business" in Texas as defined by Rule 3.286.
• If Company B is not "engaged in business" in Texas, Company B isn't required to collect the use tax — but Company C, the ultimate Texas customer, is still personally obligated to remit the use tax directly to the state.

What this means for you

Manufacturers, wholesalers, and drop-shippers

If you drop-ship goods directly to a reseller's customer in Texas, get a valid Texas resale certificate from the reseller who bought from you. That certificate is what relieves you of the collection duty — you don't need to separately verify whether the reseller or the end customer is the one who ultimately owes the tax.

Resellers (drop-ship middlemen)

Whether you must collect Texas use tax from your own customer depends on whether you are "engaged in business" in Texas under Rule 3.286 — not on where your supplier is located or where the goods physically ship from.

End customers in Texas

If neither your supplier nor the reseller you bought from collects Texas tax on a drop-shipped purchase, you are still personally responsible for remitting Texas use tax directly to the state.

Common questions

Q: Does the seller who physically ships the goods (the drop-shipper) have to collect Texas use tax?
A: No, not if it obtains a valid Texas resale certificate from the company that bought the goods for resale.

Q: Who collects the tax instead?
A: The reseller, if the reseller is "engaged in business" in Texas under Rule 3.286.

Q: What if the reseller isn't engaged in business in Texas?
A: Then no one in the chain is required to collect the tax, but the end customer in Texas still owes and must remit the use tax directly.

Q: Can I rely on this letter for my own drop-shipment arrangement?
A: No. This opinion is based on the facts presented, and additional or different facts may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.286 (Seller's and Purchaser's Responsibilities — defines "engaged in business")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200002088L

Original ruling text

February 29, 2000

Dear **:

Thank you for your recent fax regarding drop third party drop shipments and
Texas sales and use tax.

You stated that your company (Company A) holds a Texas sales tax permit.
Another company (Company B) is purchasing an item from your company for resale.
They asked that your company drop ship the item to their customer (Company C).
Company C is located in Texas.

Texas use tax is due, but your company is not required to collect it. As long
as you receive a properly completed Texas resale certificate from Company B,
you have met your legal responsibility for collecting (or not collecting) Texas
sales and use tax. I have enclosed a copy of a Texas resale certificate. You
may make additional copies if necessary.

Company B is required to collect Texas sales and use tax if they are "engaged
in business" in Texas as defined by Rule 3.286 "Seller's and Purchaser's
Responsibilities." I have enclosed a copy of the rule for your review.

If Company B is not "engaged in business" in Texas, it is not required to
collect the use tax that is due to be paid by Company C. Company C is still
obligated, however, to remit the use tax directly to the State.

This opinion is based on the facts presented. Additional or different facts
may yield different results.

You may call me toll free 1-800-531-5441, extension 5-9787, if you have any
questions or need more information. The direct line is 512/305-9787. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Philip Knisely
Tax Policy Division