When an out-of-state distributor drop-ships goods directly to a Utah customer on behalf of a reseller who has no Utah nexus, what paperwork satisfies Utah sales and use tax law?

Plain-English summary

An accountant asked on behalf of a seller: when the seller invoices a reseller customer who is licensed and has a resale certificate only in the reseller's home state (not Utah), and the seller drop-ships the goods directly to the reseller's own customer in Utah, what paperwork is required to comply with Utah sales and use tax law?

The Tax Commission's Auditing Division answered: the seller only needs an exemption certificate signed by the reseller, showing the reseller's home-state resale number -- not a Utah-specific certificate, since the reseller itself has no Utah nexus. The third party who actually receives the goods in Utah is responsible for paying use tax directly to the Tax Commission, because the sale to that end recipient is the taxable transaction and nobody in the chain is collecting Utah sales tax on it.

What this means for you

Out-of-state sellers and distributors

If you sell to a reseller with no Utah presence who has you drop-ship straight to their Utah customer, you can accept that reseller's home-state resale certificate as proof the sale to the reseller itself is a wholesale, non-taxable transaction -- you don't need a Utah exemption certificate from them. But that doesn't make the transaction tax-free end-to-end.

Utah businesses receiving drop-shipped goods

If you're the ultimate recipient in Utah of goods drop-shipped by an out-of-state reseller who has no Utah nexus, expect to self-assess and remit Utah use tax directly, since nobody upstream is positioned to collect Utah sales tax on that leg of the transaction.

Accountants and tax professionals

This is a classic three-party drop-shipment structure (out-of-state seller → out-of-state reseller with no forum nexus → Utah end customer). The ruling resolves the paperwork question (home-state resale certificate suffices between seller and reseller) but shifts the actual tax-collection obligation to use tax owed by the Utah recipient, since the reseller lacks Utah nexus to collect sales tax itself.

Common questions

Q: Does the out-of-state seller need a Utah tax exemption certificate from its reseller customer?
A: No -- a certificate with the reseller's home-state resale number is sufficient, according to this ruling, when the reseller has no Utah nexus.

Q: Who pays Utah tax on a drop-shipped sale like this?
A: The third party in Utah who receives the goods pays use tax directly to the Utah Tax Commission.

Q: Does this ruling apply to my drop-shipment arrangement?
A: Not automatically -- it binds the Commission only for the taxpayer and facts presented (a reseller licensed only in its home state, with no Utah nexus, drop-shipping to a Utah third party). Different facts, such as the reseller having Utah nexus, could change the analysis.

Citations and references

No specific statute or rule section is quoted verbatim in the surviving text of this ruling.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/92-023.pdf

Note: the cached page for this ruling also captured the full text of a separate, unrelated ruling, PLR 92-024DJ (qualifying purchases for a certified pollution control facility). That ruling is enriched separately at ut/plr-92-024-qualifying-purchases-pollution-control-facility.md; only PLR 92-023 (drop shipments) is summarized above.

Original ruling text

92-023

June
30, 1992

XXXXX

Re:
Third Party Drop Shipments

This
letter is in response to your recent request for a Tax Commission ruling on
what is required to satisfy the sales and use tax laws on third party drop
shipment sales by an out of state distributor.

The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your
request was referred to the Tax Commission's Auditing Division for their
analysis and recommendation. The division's recommendation is as follows:

A
seller making a sale to his "resale" customer who is licensed only in
his home state and does not have nexus in Utah, but is drop shipping to a third
party in Utah, is required to have a sales tax exemption certificate signed by
the "resale" customer containing his home state's resale number. The
third party is responsible to pay use tax directly to the Tax Commission.

Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendation. Obviously, if there are deviations from these facts,
this opinion may be negated.

If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached.

For
the Commission,

Joe
B . Pacheco

Commissioner

State
Tax Commission

Auditing
Division

160
E. 400 South

Salt
Lake City, UT 84134

Attention:
Sales & Use Tax Department

We
require clarification from your State on the following situation:

Our
customer operates a business as a dealer and/or distributor, who buys for
resale only and has a Tax Exempt Certificate in his home State.

He
has requested that we invoice him and then DROP SHIP air conditioners to his
customer in your State.

Is
he required to provide us with:

A)
nothing

B)
a copy of his customer's Tax Exempt Certificate

C)
a tax exempt certificate from your State in his company name

Please
provide a written opinion so that we are sure to comply with the Sales Tax Laws
of your State.

Sincerely,

XXXXX

Accountant

92-024DJ

Response
July 10, 1992

July
10, 1992

XXXXX

Re:
Qualifying Purchases, Pollution Control Facility

Dear
XXXXX:

This
letter is in response to your recent request for an advisory opinion on what
constitutes "qualifying purchases" for use in a certified pollution
control facility.

The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your
request was referred to the Tax Commission's Auditing Division for their
analysis and recommendations. The division's recommendations are as follows:

1.
Qualifying purchases are all purchases of pollution control equipment which
have been certified by the Division of Air Quality. Replacement equipment and
parts to repair certified pollution control equipment qualify for the
exemption.

2.
Consumable supplies, chemicals and cleaning materials do not qualify for sales
or use tax exemption. Filtration equipment or supplies qualify only if they are
reusable. Soda ash used to neutralize acidic gases is a consumable supply and
does not qualify for exemption.

3.
Sales Tax Rule R865-19-35S provides an exemption for fuels and electricity for
use in agriculture, manufacturing and mining.
XXXXX is not a manufacturer; therefore, the purchase of power to run
pollution control equipment is taxable.

Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these
facts, this opinion may be negated.

If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached.

For
the Commission

Joe
B. Pacheco

Commissioner

Utah
State Tax Commission

160
East 3rd South

Salt
Lake City, UT 84134

RE:
Request Advisory Opinion On "Qualified Purchases"

XXXXX
is a hazardous waste incineration facility. The plant is located in XXXXX
County, about fifty miles east of XXXXX. On XXXXX, 1992 the site received its
certification for "Sales and/or Use Tax Exemption for Pollution Control
Facility". The Certificate was received from the Utah Division of Air
Quality for selected parts of the plant.

The
Utah Administrative Code R865-19-83S, paragraph 1A states, "After the
facility is certified, qualifying purchases should be made without paying tax
by providing an exemption certificate to the vendor." Please clarify what
is a "qualifying purchase?"

Does
a "qualifying purchase" include equipment replacements and materials
required to operate and maintain equipment that the Division of Air Quality has
certified? Examples include: replacement pumps and spray nozzles for the spray
dryer (used to cool down gases before cleaning and discharge), filtration
equipment for the baghouse, soda ash (used to neutralize acidic gases) and the
cost of power to run the pollution control equipment.

I
have discussed this question with the Division of Air Quality and various
individuals within the State Tax Commission. There is a difference of opinion
about what the intent and scope of the "qualified purchase" clause
refers to once the facility has been certified. Clarification of this would be
most helpful.

Sincerely,

XXXXX

Controller