Could a Texas seller accept a California permit number on an out-of-state distributor's resale certificate for Texas drop shipments?

Plain-English summary

A seller drop-shipped goods to a Texas customer for an out-of-state distributor. The distributor had no Texas permit but supplied a resale certificate bearing its California sales-tax permit number.

Rule 3.285(d) allowed a Texas-permitted seller to accept a resale certificate from a bona fide retailer located outside Texas when the retailer bought taxable items for resale in the ordinary course of business within the United States, its territories, or possessions. If the retailer lacked a Texas permit, it could use its home-state sales-tax or registration number.

The Comptroller found this certificate met the rule. Good-faith acceptance relieved the seller from sales-tax liability for covered sales.

But if the out-of-state distributor was engaged in business in Texas, it had to obtain a Texas permit, issue a certificate using that Texas number, and collect and report Texas sales and use tax on its taxable Texas sales.

What this means for you

Drop shippers and wholesalers

An out-of-state number was not automatically defective. The seller could accept it when Rule 3.285(d)'s location, resale, and good-faith requirements were met.

Out-of-state retailers

Texas business activity changed the documentation and collection duties. A retailer engaged in business in Texas could not rely on its home-state number alone under this letter.

Common questions

Could the California permit number be used? Yes, because the distributor had no Texas permit and otherwise met the out-of-state retailer rule.

What protected the Texas seller? Good-faith acceptance of a certificate meeting Rule 3.285(d).

What if the distributor was engaged in business in Texas? It needed a Texas permit and had to collect and report Texas tax on taxable Texas sales.

Citations and references

• 34 Tex. Admin. Code Rule 3.285(d) (out-of-state retailers' resale certificates)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1162G08

Original ruling text

February 24, 1992

Dear ****:

Your letter requesting a written ruling on the validity of a resale
certificate issued by an out-of-state distributor, COMPANY X, on sales
drop-shipped to its Texas customer has been assigned to me for review and
response. I appreciate your patience and apologize for the delay in
responding.

COMPANY M charges sales tax according to the ship to location. In this
situation, you charged Texas sales tax to COMPANY X since you do not have a
resale or exemption certificate for COMPANY X on file for the State of Texas.
COMPANY X did issue your company a resale certificate bearing its California
sales tax permit number.

Section (d) of the enclosed Rule 3.285, Resale Certificates, Sales for
Resale, allows a seller permitted to collect Texas Sales and Use tax to accept
a resale certificate from a bona fide retailer located outside Texas who
purchases taxable items for resale in the regular course of business. The
items purchased must be for sale, lease or rental within the geographical
limits of the United States of America, its territories and possessions. If the
out-of-state retailer does not have a Texas sales tax permit number, it may use
the sales tax or registration number assigned to it by its home state.

The certificate, issued to COMPANY M, by COMPANY X, meets the
requirements of section (d) and therefore a good faith acceptance by COMPANY M
relieves it from liability for sales tax on sales covered by that certificate.
If COMPANY X is engaged in business in Texas, it is required to obtain a Texas
permit, issue a resale certificate with its Texas permit number, and collect
and report Texas sales and use tax on its taxable sales into Texas.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call 512/463-4600,
or 1-800-252-5555 from outside Austin. You may write to Tax Administration
Division.

Sincerely,

Gilbert Zamora
Tax Administration Division