In a three-party drop-shipment chain (Seller Corp. sells to out-of-state Buyer Corp., but ships directly to Buyer Corp.'s Texas customer, Other Corp.), what documentation does Seller Corp. need to avoid collecting Texas tax, can it accept Buyer Corp.'s home-state resale certificate instead of a Texas one, and does an affidavit from Other Corp. (about tax it separately paid) relieve Seller Corp. of liability?

Plain-English summary

This letter is a follow-up clarification to an earlier multistate tax administrators' survey response about drop shipments. The fact pattern involves three parties: Seller Corp. sells to Buyer Corp. (Seller Corp.'s out-of-state customer), but ships the goods directly to Other Corp. (Buyer Corp.'s own customer, located in Texas).

Documentation to avoid collecting Texas tax. A valid resale exemption certificate from Buyer Corp. relieves Seller Corp. of the responsibility to collect Texas tax on the Seller-Corp.-to-Buyer-Corp. sale. The requester asked whether this certificate must be a Texas-specific form or can be Buyer Corp.'s home-state certificate — the answer is that it can be a Texas resale certificate, a multi-jurisdiction resale certificate, OR Buyer Corp.'s home-state certificate, as long as it contains ALL the information Rule 3.285(g) requires for a Texas resale certificate: the purchaser's name/address; the purchaser's sales tax permit number (or a statement that a permit application is pending, valid for only 60 days); a description of the taxable items the purchaser generally sells and of the items being purchased tax-free; the purchaser's signature and date; and the seller's name/address. If Buyer Corp. isn't required to hold a permit in its home state, that fact should simply be stated on the certificate.

The affidavit problem. The requester also asked whether an affidavit from Other Corp. — certifying that Other Corp. itself had accrued and paid Texas use tax on ITS purchase from Buyer Corp. — would relieve Seller Corp. of liability, and whether it matters if Other Corp. is reselling versus consuming. The Comptroller said no: Seller Corp. is liable only for the Seller-Corp.-to-Buyer-Corp. transaction, which is a SEPARATE transaction from the Buyer-Corp.-to-Other-Corp. sale that the affidavit actually documents. Each transaction stands on its own — you can't infer that the first transaction (Seller to Buyer) was for resale just because paperwork from the second transaction (Buyer to Other Corp.) shows tax was paid. A 1984 law change specifically established that resale/exemption certificates are the ONLY acceptable documentation of a nontaxable sale (before 1984, other convincing evidence could sometimes substitute), so an affidavit about a different transaction can't fill that gap.

What this means for you

Sellers in multistate drop-shipment arrangements

Get a resale certificate directly from your immediate buyer (not the ultimate recipient) — it can be your buyer's home-state certificate or a multi-jurisdiction certificate, but it must contain all the Rule 3.285(g) elements. Don't rely on paperwork from a downstream transaction (like an affidavit from the final recipient) to excuse you from needing your own certificate.

Businesses receiving out-of-state drop-shipped goods in Texas

If you're the ultimate Texas recipient and you pay use tax directly, that doesn't automatically clear the upstream seller's obligation on the separate transaction between your supplier and its own seller — each link in the chain needs its own proper documentation.

Accountants and tax professionals

This is a clean, citable explanation of Texas's post-1984 "certificate or nothing" documentation rule for nontaxable sales, plus confirmation that multi-jurisdiction and other-state resale certificates are acceptable substitutes for a Texas-specific form as long as they contain the same required content.

Common questions

Q: Can I accept my out-of-state buyer's home-state resale certificate instead of requiring a Texas one?
A: Yes — a Texas resale certificate, a multi-jurisdiction certificate, or the buyer's home-state certificate are all acceptable, as long as the certificate contains all the information Rule 3.285(g) requires.

Q: Does an affidavit from the ultimate Texas recipient, showing it paid use tax, relieve me of liability on my own sale to my direct customer?
A: No — each transaction stands on its own; that affidavit documents a different (downstream) transaction and doesn't substitute for your own resale certificate.

Q: What are the minimum required elements of a valid Texas resale certificate?
A: Purchaser's name/address, sales tax permit number (or pending-application statement), a description of items generally sold and items purchased tax-free, the purchaser's signature and date, and the seller's name/address (Rule 3.285(g)).

Q: Can I rely on this letter for my own drop-shipment arrangement?
A: No — a Texas letter ruling can be the basis of a detrimental reliance claim only for the taxpayer it was issued to.

Citations and references

• 34 Tex. Admin. Code Rule 3.285(g) (content requirements for a valid resale certificate)

Subject

Drop Shipment — To Third Party Recipients In Texas

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710334L

Original ruling text

October 27, 1997

Dear **:

Thank you for your inquiry asking for clarification of the Third Party Drop
Shipment survey responses. I apologize for taking so long to respond.

The survey involved three parties; 1. Seller Corp. (COMPANY A); 2. Buyer
Corp. (COMPANY A's OOS customer); and, 3. Other Corp. (Customer's Texas
customer.) The transactions involved Seller Corp., selling to Buyer Corp., but
shipping to Other Corp.

The first question on the survey is, "What is the minimum documentation your
state will accept so that Seller Corp. need not collect your state's tax from
Buyer Corp. on this transaction.?"

Our response was, "A valid resale exemption certificate from Buyer Corp. will
relieve Seller Corp. of responsibility to collect tax."

Your question now is whether the resale certificate may be a certificate from
the buyer's home state or must it be a Texas resale certificate. The
certificate may be either a Texas resale certificate, a multi-jurisdiction
certificate or the buyers home state certificate so long as it contains all of
the information required on a Texas resale certificate. Rule 3.285 provides
that the information required is:

(g) Content of a resale certificate. A resale certificate must show:
(1) the name and address of the purchaser;
(2) the number from the sales tax permit held by the purchaser or a statement
that an application for a permit is pending before the comptroller with the
date the application for a permit was made. If the application is pending, the
resale certificate is valid for only 60 days, after which time the resale
certificate must be renewed to show the permanent permit number. If the
purchaser holds a Texas sales and use tax permit, the number must consist of 11
digits that begin with a 1, 2, or 3. Federal employer's identification (FEI)
numbers or social security numbers are not acceptable evidence of resale. See
also subsection (d)(2) of this section regarding registration numbers for
retailers outside Texas;
(3) a description of the taxable items generally sold, leased, or rented by the
purchaser in the regular course of business and a description of the taxable
items to be purchased tax free by use of the certificate. The item to be
purchased may be generally described on the certificate or itemized in an order
or invoice attached to the certificate;
(4) the signature of the purchaser and the date; and
(5) the name and address of the seller.

You also need clarification to response on the 7th question of the survey.

This question followed from question six. "If Other Corp. is a consumer, would
the execution of an Affidavit from Other Corp. to Buyer Corp., furnished to
Seller Corp., be sufficient to relieve Seller Corp. from further responsibility
or liability for your state's tax?" (The affidavit certified to Seller Corp.,
the fact that Other Corp. had accrued and paid use tax on the purchase from
Buyer Corp.) Question 7 was, "Does it matter if Other Corp., is reselling as
opposed to consuming?"

Our response was, No, Seller Corp. is liable for tax only for the transaction
with Buyer Corp. Because Buyer Corp., is not required to collect Texas tax,
Other Corp., is solely liable for tax directly to Texas on the sale transaction
between it and Buyer Corp.

You now ask whether Seller Corp. may sell to Buyer Corp. without Buyer Corp.'s.
home state resale license on file, if the Buyer Corp. is not required to be
licensed in its home state.

The answer is the same as for question no. 1 on the survey. Seller Corp. must
have a resale certificate from Buyer Corp. in order to sell tax free. The
resale certificate may be a Texas resale certificate, or a multi-jurisdiction
resale certificate or Buyer's home state resale certificate.
Multi-jurisdiction and other states resale certificates are acceptable only if
they contain all of the information required in the Texas resale certificate.
The Buyer may issue a Texas resale certificate with the Buyer's home state
permit number. If the buyer is not required to be permitted in its home state,
a statement of that fact should be included on the resale certificate.

One problem with the affidavit issued by Other Corp. is that it addresses tax
paid on a transaction between Other Corp. and Buyer Corp. The transaction that
is in question, is the one between Seller Corp. and Buyer Corp. Each
transaction stands on its own. And, although a person might infer or conclude
from an affidavit from a person to the second transaction, that the first
transaction must have been for resale, such an inference is not provided for
under Texas law.

A law change in 1984 specified that resale certificates or exemption
certificates were the only form of documentation of nontaxable sales receipts.
Prior to the 1984 change, the law simply provided that receipts from sales were
presumed to be taxable until the contrary was established. Although resale and
exemption certificates accepted at the time of sale overcame the presumption of
taxability, other convincing evidence could be presented documenting an
exemption.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Administration Division, Comptroller
of Public Accounts. My internet address is .

Sincerely,

Tom Soto
Tax Policy Division