Does a manufacturer have to collect Utah sales tax when its customer resells the goods online, or when a no-nexus out-of-state reseller has the manufacturer drop-ship straight to the reseller's Utah customer?

Plain-English summary

A metal building manufacturer, registered to collect Utah sales tax, sent the Commission two separate letters about who owes tax in multi-party sales chains — a live issue because some of its Utah customers were reselling the buildings online and pushing back on being charged sales tax.

Reselling to an online reseller (first letter). The manufacturer sells to "Company A" (apparently based in Utah, since the manufacturer was collecting Utah tax on that sale), and Company A resells online to the final customer. The manufacturer assumed it was still responsible for collecting tax on the ultimate sale. Wrong: Company A, not the manufacturer, is the one that owes tax on the final sale to the end customer — Company A has its own Utah nexus (the Commission cited National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), for the rule that in-state property or employees are enough to establish nexus), so it must register and collect tax on its Utah sales "whether by a sales representative or online." Selling online doesn't change the analysis at all. For the manufacturer to avoid collecting tax on its own sale to Company A, it needs a completed Form TC-721 resale exemption certificate from Company A (§ 59-12-106(2); Rule R865-19S-23) — without it, the manufacturer remains on the hook.

No shortcut via a promise-to-pay letter. The manufacturer also asked whether a letter from its customer promising to cover any sales tax, penalties, and interest later found due would satisfy its own collection obligation. No — Utah has no "direct pay" permit mechanism (Tax Bulletin 2-91). Only a valid TC-721 showing the sale is for resale or otherwise exempt shifts the collection duty; an informal indemnity letter does not.

Third-party drop shipment (second letter). Here the manufacturer sells to an out-of-state reseller ("Company B," in Colorado) that has no Utah nexus, and ships the building directly to Company B's own Utah customer. Because the sale from the manufacturer to Company B is a sale for resale, the manufacturer isn't responsible for tax if it holds Company B's resale certificate. And because Company B itself has no Utah nexus, Utah can't require it to collect and remit tax either. The result: neither party in the chain collects Utah sales tax — but that doesn't mean the transaction escapes tax altogether. The Commission noted in a footnote that the Utah end customer is required to directly report and pay Utah use tax on the purchase.

No internet-specific rule. The Commission also confirmed that, as of this 2002 ruling, no pending legislation and no special tax treatment applied to internet sales — a sale made online by a company with Utah nexus is taxed exactly the same as an in-person sale.

What this means for you

Manufacturers and wholesalers selling to resellers

Whether your customer resells in a store or online doesn't change your own tax obligations. What protects you from having to collect tax on your own sale to that reseller is a properly completed resale exemption certificate (Form TC-721) — not a side letter promising to cover the tax later, which Utah does not recognize as a substitute.

Businesses doing third-party (drop-ship) sales

If you sell to an out-of-state reseller with no Utah nexus who then has you ship straight to their own Utah customer, get and keep a resale certificate or a no-nexus letter from that reseller. Neither you nor the reseller then owes Utah sales tax — but the Utah end customer independently owes use tax on the purchase, which is worth disclosing so the transaction isn't mistakenly treated as tax-free for everyone.

Accountants and tax professionals

This ruling is a clean two-scenario illustration of how documentation (not geography or sales channel) decides who collects: Form TC-721 shifts liability down the chain to the party actually selling to the final consumer, and if that final-consumer sale falls outside Utah's reach because the reseller lacks nexus, the burden shifts all the way to the end customer's own use-tax obligation.

Common questions

Q: If our customer resells what we sold them over the internet, do we still have to collect tax on our original sale?
A: Not if you obtain a valid Form TC-721 resale certificate from that customer. Without it, you remain liable for the tax on your sale to them.

Q: Can our customer just send us a letter promising to pay any tax later found due instead of an exemption certificate?
A: No. Utah has no "direct pay" permit process; only a properly completed exemption certificate shifts your collection duty.

Q: We drop-ship to a no-nexus out-of-state reseller's Utah customer — does anyone have to collect Utah sales tax?
A: Not you or the reseller, if you hold a resale certificate or no-nexus letter from the reseller. But the Utah end customer must report and pay use tax directly.

Q: Does selling online change any of this?
A: No — Utah taxes online and in-person sales by a company with Utah nexus the same way; there's no separate internet-sales rule.

Q: Can we rely on this ruling for our own resale/drop-ship arrangements?
A: No — it's an advisory opinion based on this manufacturer's specific chain of sales and documentation. Different facts (different nexus status, missing certificates) could change the outcome.

Citations and references

Statutes, rules, and case law:

• Utah Code Ann. § 59-12-106(2) (documentation required to prove an exempt resale)
• Utah Code Ann. § 59-12-107 (retailer nexus/collection duty)
• Utah Admin. Rule R865-19S-23 ("Rule 23": exemption-certificate documentation for resale sales)
• Utah State Tax Commission Tax Bulletin 2-91 (no "direct pay" permit for sales tax)
• National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977) (in-state property/employees establish nexus)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/02-011.htm

Original ruling text

1 ST REQUEST LETTER

02-011

NAME

COMPANY

ADDRESS

COMPANY is a metal building manufacturer with plants located throughout the United States. We are a registered retailer in the state of Utah and are required to collect sales/use tax in your state. We have acquired several customers recently that purchase buildings from us and then resell the buildings to a third party through their website on the Internet. Frequently, we are presented with the debate that since the buildings are being sold online, sales tax will not apply to the transaction. Our argument for charging applicable sales tax is that the sale between COMPANY and our customer is not online. Therefore, since we have nexus (due to having either a plant or sales representation) in the state of Utah, sales tax would be due on the transaction.

The following questions have been presented in regarding to the above situation:

• Question 1. When presented with the conditions outlined above, are we correct in stating that we are required by the laws in your state to collect the appropriate sales/use tax that would be due on this type of transaction?

• Question 2. Are there any bills pending in your legislature that may alter your determination if signed into law?

• Question 3. If we presented with a letter from our customer, on their company letterhead, stating that they would pay all applicable sales taxes, penalties, and interest if it is later determined in an audit that the tax was due on the transaction, would our obligation to collect the sales tax at the time of sale be satisfied?

So that we can better serve our customers and the state of Utah, please provide a written ruling on the above questions as soon as possible. We have several orders pending at this time that need these issued resolved before we will be able to proceed with the fabrication of the building. If possible, please fax your response to my attention at PHONE. Otherwise, please mail your response to the address above.

Sincerely

NAME

2 nd REQUEST LETTER

April 25, 2002

NAME

COMPANY

ADDRESS

Ref: Request for Written Ruling

Dear NAME

COMPANY, is a metal building manufacturer and a registered retailer in the state of Utah. We are required to collect sales/use tax in your state. We have a customer that is located in Colorado that is purchasing a metal building from us. This Colorado customer has requested that we ship this building via common carrier to his customer who is located within the state of Utah and drop-ship the building at the Utah jobsite (third-party drop shipment transaction. Our Colorado customer is not registered in the state of Utah.

Will the state of Utah accept our customer's Colorado number or does Utah require anyone doing business in your state to register for sales tax? If Utah will accept the Colorado customer's number, what documentation will be required for our files to support this exemption?

Also, quite often, we have the exact same transaction as described above, but the Colorado customer will retain the common carrier, send it to our plant to pick up the building, and then deliver the building to the end-user in Utah. Does the tax liability remain the same in this transaction? If not, where does the tax liability occur?

So that we may better serve our customers and the state of Utah, please provide a written ruling on the above questions as soon as possible. You may mail your response to my attention at the mailing address shown above or e-mail to EMAIL. Thank You.

Sincerely

COMPANY

NAME

RESPONSE LETTER

July 2, 2002

NAME

COMPANY

ADDRESS

Re: Taxability of Internet sales of metal buildings and the taxability of third party drop shipments

Dear NAME,

You have sent us two letters requesting information on sales of metal buildings in Utah. According to your first letter, COMPANY is a registered retailer in the state of Utah. Your letters request information regarding the responsibility of COMPANY to collect tax on metal buildings it sells to customers in Utah and information on buildings sold to out of state customers who then request the building to be shipped directly to their customers in Utah. We will address your concerns from both letters.

First Letter.

The first letter addresses the sale of buildings to a customer in Utah that resells the buildings to another customer. COMPANY has been collecting sales tax on all of the buildings it sells in Utah, but several new customers are reselling the buildings online and do not believe COMPANY should be charging them sales tax. Each of the three questions your letter addresses will be discussed.

Question 1.
The first question addresses whether COMPANY is correct in assuming it is
responsible for collecting sales/use tax when it sells its metal buildings
to another company (�Company A�) that resells the buildings to a final customer
(�Customer 1�) through the Internet. This assumption is incorrect. COMPANY
sells its merchandise to Company A that is presumably located in Utah because
COMPANY is collecting Utah sales tax on the transaction. Company A then sells
the building to Customer 1.

If Customer 1 were the final customer, then
Company A, not COMPANY, would be responsible for collecting the sales
tax. It has been found that the in-state presence of property and employees
is all that is needed to establish nexus for collection of sales and use tax
for a retailer. (see National Geographic Society v. California Board of
Equalization, 430 U. S. 551 (1977)). Accordingly, from the facts presented
in your letter, it appears that Company A has nexus with Utah and is required
to obtain a Utah sales tax license, if it does not already have one, and collect
and remit sales tax on all taxable sales made in Utah whether by a sales representative
or online.

However, since COMPANY is registered to collect and remit Utah sales tax on sales in Utah, it must document its exempt sale to Company A. Otherwise it can be held liable for Utah sales tax on the transaction. [(Utah Code Ann. �59-12-106 (2); Utah Admin. Rule R865-19S-23, (�Rule 23�)]. To document your exempt sale to Company A, our current policy requires that you have Company A complete a Utah sales tax exemption certificate (Form TC-721, copy attached) indicating that its purchases from COMPANY are for resale. In the space that asks for the Utah sales tax number on the Form TC-721, Company A would put its Utah number and be responsible to collect and remit sales tax on all taxable sales made within the state whether online or by a sales representative.

Question 2. The second
question addresses whether there are any bills pending before the Utah legislature
that change the taxability of Internet sales transactions. All sales made
by Utah companies, whether in person or through the use of the Internet, are
taxed in the same manner if they are sold to Utah customers. During the previous
legislative session, there were not any bills that would have altered or changed
the taxation on Internet sales. Currently, there are no proposals, nor do
we foresee any such changes in the taxation methods in the immediate future.

Question 3. The third
question concerns whether COMPANY has Utah sales tax liability if documentation
is received that any Utah sales tax, penalties and interest will be paid by
Company A. Utah law does not provide for a �direct pay� permit or method
of reporting sales tax on purchases from Utah suppliers. (See Tax Bulletin
2-91, copy attached). COMPANY can be held liable for all sales made to customers
in Utah unless it obtains a valid Form TC-721 that shows the sale is for resale
or otherwise exempt. If the proper documentation is obtained to prove that
an exempt sale has been made, then the responsibility of collecting sales
tax shifts from COMPANY to Company A. (Utah Code Ann. �59-12-106 (2); Rule
23) Again, COMPANY would not be responsible for collecting sales tax on
the resale transactions made to Company A, but Company A would need to collect
and remit all applicable Utah sales tax for sales made within Utah.

Second Letter.

Your second letter addresses whether COMPANY is required to collect sales or use tax on sales of merchandise to a Colorado reseller when COMPANY is the party who ships the merchandise directly to the reseller�s customers in Utah.

According to your letter, COMPANY sells its merchandise to another company (�Company B�) that is located in a different state, Colorado in this instance. However, COMPANY does not ship the merchandise to Company B. Instead, it ships the merchandise directly to Company B�s customer (�Customer 2�), who is located in Utah. Company B is located outside of Utah. Because of your statement in your letter, we assume Company B does not have nexus with Utah and, thus, it is not required to be registered to collect and remit sales tax.

We also assume that Customer 2 is the final
consumer. Under these circumstances, the sale from COMPANY to Company B is
a sale for resale. COMPANY receives a sale for resale certificate from Company
B and is not responsible to collect sales or use tax on the sales made by
Company B. In addition, since Company B is not registered and appears not
to have nexus with Utah in its business relationships, Utah is not able to
require it to collect and remit sales and use tax. Under these circumstances
neither COMPANY nor Company B would be required to collect and remit Utah
sales tax on this transaction.[1] COMPANY may keep on record a letter from Company B
stating that Company B has no nexus with Utah for sales tax purposes under
Utah Code Ann. �59-12-107 (copy attached) and that items purchased by Company
B from COMPANY are intended for resale. Even if Company B did in fact have
nexus with Utah, COMPANY still has no sales tax liability if it receives a
properly completed exemption certificate from Company B.

In summary, COMPANY is not required to collect and remit sales tax for the sales of merchandise to Company B as long as it follows the above-mentioned requirements. COMPANY may have nexus with Utah in other transactions, but this does not impute the responsibility to collect tax on sale for resale transactions or on third party drop shipments, as described in your letter, where COMPANY is not the seller to the final customer.

Please contact us if you have any further questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/PL

02-011

[1] However, Customer
2 would be required to directly report and pay to the Tax Commission the Utah
use tax that is due on the sale.