When a Texas-permitted seller drop-ships to a Texas customer on behalf of an out-of-state retailer, can it accept the out-of-state retailer's resale certificate instead of collecting sales tax?

Plain-English summary

A company that drop-ships products directly to a Texas customer's address on behalf of another company ("Company A") had been charging Texas sales tax on those sales because it holds a Texas sales tax permit and the "ship to" address was in Texas. It asked whether it could instead accept a resale certificate from Company A and skip collecting tax.

The Comptroller said yes: under Rule 3.285(d), a Texas-permitted seller may accept a resale certificate from a bona fide out-of-state retailer purchasing items for resale, lease, or rental anywhere within the U.S. or its territories -- and if that out-of-state retailer doesn't have its own Texas sales tax permit, it can use the sales tax/registration number assigned by its home state instead. Critically, the drop-shipping seller doesn't have to first determine whether the out-of-state retailer is itself "engaged in business" in Texas (which would trigger the retailer's own duty to register and collect Texas tax) -- it can accept the certificate in good faith and let that determination fall on the out-of-state retailer.

What this means for you

Wholesalers and drop-shippers

If you're shipping directly to a Texas end customer on behalf of an out-of-state retailer client, you don't need to charge Texas sales tax just because the delivery address is in Texas -- you can accept that retailer's resale certificate (using its home-state registration number if it lacks a Texas permit) and rely on it in good faith.

Out-of-state retailers using Texas drop-shippers

You may need your own Texas sales tax permit if you're "engaged in business" in Texas under Rule 3.286 -- that determination is on you, not your drop-shipping vendor, but it still matters for your own compliance.

Accountants and tax professionals

This letter cleanly separates two duties: the drop-shipping seller's duty (accept a facially valid resale certificate in good faith) from the out-of-state retailer's duty (determine its own Texas nexus and permit obligations under Rule 3.286).

Common questions

Q: Do I have to charge Texas sales tax on a drop-shipped item just because it's delivered to a Texas address?
A: Not if the party you're selling to is a bona fide out-of-state retailer buying for resale -- you can accept its resale certificate (home-state number if no Texas permit) under Rule 3.285(d).

Q: Am I responsible for verifying the out-of-state retailer has its own Texas nexus/permit?
A: No, per this letter -- you may accept the resale certificate in good faith without determining whether the retailer is "engaged in business" in Texas.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.285(d) (Resale Certificates, Sales for Resale)
• 34 Tex. Admin. Code Rule 3.286 (Seller's and Purchaser's Responsibilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911918L

Original ruling text

November 30, 1999

Dear **:

Thank you for your recent letter requesting a written ruling on sales
drop-shipped by your company to another company's customer in Texas.

In this situation, you charged Texas sales tax to COMPANY A since you hold a
Texas sales tax permit and the "ship to" address was in Texas.

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. Therefore, you
may accept a properly completed resale certificate from an out-of-state
retailer in good faith.

If COMPANY A is "engaged in business" in Texas as defined in Rule 3.286
"Seller's and Purchaser's Responsibilities" 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.
However, you are not responsible for determining if COMPANY A is "engaged in
business" in Texas and may accept a resale certificate from an out-of-state
retailer as explained in Rule 3.285(d).

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