Did a Florida manufacturer have to collect sales tax when an unregistered out-of-state distributor ordered goods drop-shipped to a Florida customer?

Subject

Third Party Drop-Shipments

Plain-English summary

The Florida manufacturer had to collect Florida sales tax from an unregistered out-of-state distributor whenever the distributor directed it to deliver the products to the distributor's Florida customer. The Department applied that result to all six proposed fact patterns.

The distributor's resale certificate from its home state was not enough. The ruling said Florida law required strict compliance with Florida's resale-certificate rules, and an unregistered distributor could not give the manufacturer a valid Florida resale certificate. The tax therefore applied to the manufacturer's first-level sale to the distributor even though the distributor planned to resell the goods.

For the distributor's separate sale to the Florida purchaser, the Department said Florida use tax applied only in fact pattern 1. It said no use tax could be imposed in patterns 2 through 6 because the hypothetical purchasers qualified through resale, exemption certificates, direct-pay authority, or export documentation.

What this means for you

Under the 1994 rules applied here, calling a transaction a resale did not remove the Florida manufacturer's collection duty when the buyer was not registered in Florida and the goods were delivered to that buyer's Florida customer. Certificate validity and the delivery chain were decisive.

Common questions

Could the manufacturer accept the distributor's home-state resale certificate? No. The Department said the relevant Florida rules required a Florida certificate.

Did the manufacturer have to know the distributor's retail price? The ruling imposed tax on the manufacturer's sale to the distributor; the stated facts said the manufacturer generally did not know the later retail price.

Was the Florida end purchaser always liable for use tax too? No. The ruling found use-tax liability only for fact pattern 1 and explained why patterns 2 through 6 were exempt or otherwise documented.

Citations and references

• Fla. Stat. §§ 212.06(6), 212.07(1)(b), and 213.22
• Fla. Admin. Code rr. 12A-1.038(2), (4) and 12A-1.091(10)
• Steelcase, Inc. v. Director, Division of Taxation, CCH New Jersey Tax Reports 400-234 (N.J. Tax Ct. 1993), as cited in the advisement
• State Department of Revenue v. Anderson, 404 So.2d 397 (Fla. 1981), as cited in the advisement

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-060

Original ruling text

Title:

Third Party Drop-Shipments

Nov 17, 1994

Re: TAA 94A-060
Applicability of Florida sales tax on third party dropshipments wherein sales are made by a registered Florida
dealer to an unregistered out-of-state customer who
requires shipment of the goods to a Florida end-purchaser.
Section 212.07(1)(b), F.S.
Rule 12A-1.038(2), and (4), F.A.C.
Rule 12A-1.091(10), F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated August 15, 1994, in which you questioned the
validity of subjecting to Florida sales tax, certain third party
drop-shipment transactions of the business entity you represent,
XXX (herein Taxpayer), notwithstanding an administrative rule,
and an "internal position" of the Department which describe such
transactions as taxable. You contend that a statute, s.
212.06(6), F.S., levies Florida sales tax solely on "...the sale
at retail..." and that the drop shipments described in your
letter are not such sales "at retail." You also cite a recent
decision in the New Jersey Tax Court, categorized by the court
as a case "of first impression," wherein certain drop-shipments
of the kind you assert are described in your letter, were found
to be sales for resale, not subject to tax.

Specifically, your letter asks the Department to determine
whether 6 different drop-shipment transactions are subject to
Florida sales tax.

Before the Department formulates its response to those
transactions, the facts, as described in your letter will, in
part, be replicated below, as will your arguments that these
drop-shipments are not "sales at retail."

You provide the following facts:

"[Taxpayer] has a Florida manufacturing facility which is
registered as a dealer for Florida sales tax purposes.
[Taxpayer's] sales are generated from catalogs which are used by
distributors located throughout the country. [Taxpayer]
receives purchase orders (P.O.'s) from the distributors to
imprint specialized logos on ink pens or lighters. These orders
are placed by the distributors by mail, overnight, fax, or
telephone, based on [Taxpayer's] catalog prices and discount
codes. In order to conduct efficient operations, the
distributors often request [Taxpayer] to drop ship the imprinted
pens or lighters to the end user's location. Some of these drop
shipments are to the distributors' customer location in Florida.
...

"The distributors' business operations consists of selling the
pens/lighters ordered from [Taxpayer] to end users all over the
country. As with similar manufacturers in this industry,
[Taxpayer] has no direct contact with the distributor's
customers and has no control over the distributor's retail
pricing to end users.
...

"[Taxpayer] bills the distributors based on the wholesale price
provided for the items specified in the P.O. If the distributor
is a registered Florida dealer, it provides [Taxpayer] a Florida
sale-for-resale certificate for sales tax on the transaction.
In many instances, the distributor is not located in Florida and
has not registered to do business in Florida. As the
distributor in this case can not provide a valid sale-for-resale
certificate, [Taxpayer] typically will receive a certificate
from the distributor's home state to support that the
transaction is a sale-for-resale or that the shipment will be
delivered outside Florida.

"The customers who purchase pens/lighters from the distributors
may be the end user, a tax exempt organization or governmental
entity, a reseller or an organization such as a cruise ship or
airline which may present valid direct pay permits to the
distributor. Also, the customers may have the pens/lighters

delivered to one main location for distribution to other company
locations throughout the country.

"The distributor bills the end user the agreed-upon retail price
for the ink pens/lighters. In most, if not all, instances
[Taxpayer] does not have knowledge of the retail price being
charged between the distributor and the ultimate purchaser and
does not ship C.O.D. When the distributor is not located or
registered in Florida as a dealer, it does not charge sales tax
to the Florida end user. If the distributor is a Florida
dealer, it charges and collects Florida sales tax on sales to
Florida end users or receives an appropriate exemption
certificate.

"[Taxpayer] has no contractual relationship with the end users.
The distributor's customer does not receive a bill from
[Taxpayer] and the two parties have no direct contact other than
the delivery of the goods via a common carrier. [Taxpayer]
delivers the goods F.O.B from its manufacturing facility to the
common carrier."

In the segment of your letter under the legend TAXATION, you
cite s. 212.06(6), F.S., as support of your argument that these
drop-shipments are sales for resale. This statute provides that
it is the intention of the statutory chapter to levy a tax on
the sale at retail. You also cite Rule 12A-1.091(10), F.A.C.,
which requires that sales tax be collected from an out-of-state
unregistered dealer who buys goods from a Florida manufacturer
who then delivers the goods to the Florida customer.

You also discuss an "internal position" of the Department as it
was expressed in a trade group questionnaire. This "internal
position" presents eight diagrams depicting different fact
patterns of drop-shipments. You state that the seventh and
eighth diagrams are analogous to the facts of [Taxpayer].

In the segment of your letter under the legend TAXPAYER'S
POSITION you reiterate the position that the sale between
Taxpayer and distributor is not a sale at retail because it is
not a sale to the end user. You state that Taxpayer currently
receives a Florida resale certificate in a sale to a Florida

based distributor, but if the sale is to a distributor located
in another state the Taxpayer receives that state's resale
documentation.

You protest the Department's requirement that in this latter
event Taxpayer must collect the tax from the out-of-state
distributor as required under Rule 12A-1.091(10), F.A.C., or
that, in another instance, Taxpayer must collect the tax from
the end-user, as expressed in the "internal position," if the
drop-shipment is made from Taxpayer's location in Florida to the
end user's location in Florida.

You also cite the case of Steelcase, Inc. v. Director, Division
of Taxation, CCH New Jersey Tax Reports 400-234 (New Jersey Tax
Court 1993), wherein the court held that New Jersey law and the
regulations of the Division of Taxation require the Division of
Taxation to consider any proof, including documents of the
domiciliary state of the non-New Jersey distributor, in
determining whether the sale is for resale. If the transaction
is of that character, then no tax may be levied irrespective
whether the goods are shipped from a location in New Jersey to
the New Jersey site of the distributor's customer. You conclude
your letter by positing 6 fact patterns all of which relate to
Taxpayer who ships to a Florida end-user pursuant to
instructions from Taxpayer's out-of-state unregistered customer.

Department Response

As you correctly state, the Department's administrative rule,
Rule 12A-1.091(10), F.A.C., requires a Florida manufacturer to
collect Florida sales tax from an out-of-state, unregistered
dealer in the instance where the manufacturer delivers the goods
to the Florida customer of the dealer. You are also correct
when you cite the Department's response to a trade group's
questionnaire that the Florida drop-shipper (when such shipper
is not a Florida manufacturer) is required to collect tax from
the Florida customer of an out-of-state, unregistered seller
when the drop-shipper delivers the goods from the drop-shipper's
Florida site, or when the drop shipper either delivers the goods
by its own or leased trucks, or when the payment terms are COD
irrespective, in either of these two instances, of the location

of the drop-shipper.

It is the understanding of the Department that Taxpayer operates
from its manufacturing facility in Florida. Thus, as required
by subsection (10) of Rule 12A-1.091, F.A.C., Taxpayer shall
charge the appropriate Florida sales tax on any sale to an outof-state unregistered dealer who requires Taxpayer, pursuant to
such sale, to deliver its products to the Florida customer of
such dealer.

This rule, Rule 12A-1.091(10), F.A.C., requires a Florida
manufacturer to collect the Florida sales tax on any taxable
sale made to an unregistered out-of-state dealer who directs the
Florida manufacturer to delivery the goods, which are the
subject matter of the sale, to the Florida customer of the outof-state dealer. The tax is collected from the out-of-state
dealer because the dealer, being unregistered in Florida for
sales tax purposes, cannot extend to the Florida manufacturer a
valid Florida resale certificate.

It is the position of the Department that the Steelcase decision
is not persuasive because the Florida law and administrative
rules do replicate the New Jersey law which the New Jersey Tax
Court found to be a permissive scheme of extending resale
certificates. In Steelcase, the court concluded that the New
Jersey statute, s. 54:32B-12(b), NJSA, failed to provide the
requirement that the sole, acceptable resale certificate be
issued by the New Jersey dealer.

However, the Florida statutes have no such deficiency. Section
212.07(1)(b) requires that a resale be made in "...strict
compliance with the rules and regulations, and any dealer who
makes a sale for resale which is not in strict compliance shall
himself be liable for and pay the tax."

The administrative rules interpreting this statute leave no
doubt (except in the instances of specific exceptions which
exceptions enforce the Department's position) that the only
resale certificate which is acceptable is that issued by
Florida. Subsection (4) of Rule 12A-1.038, F.A.C., strictly
limits resale certificates to those issued by this state. The

rule language states that "[a] dealer shall refuse to accept a
resale certificate [except in the instance of export from this
state solely for purposes of resale] and shall collect the tax
unless the purchaser has obtained a dealer's certificate of
registration from the Department of Revenue...." Subsection (2)
of the administrative rule even provides the standard for
determining the effective date of the Florida resale
certificate. These provisions provided the basis for settling
the question of the issuance of a valid certificate of resale in
the decision by the Supreme Court of this state in State
Department of Revenue v. Anderson, 404 So.2d 397 (Fla. 1981).

Thus, the Department finds that in no instance may Taxpayer
avoid the collection of sales tax from its out-of-state
unregistered customer in any of the fact patterns provided at
the conclusion of your letter. The tax is on the first level of
each of the 6 transactions, that is, on the sales by Taxpayer to
the unregistered out-of-state customer who must pay Florida
sales tax because such customer, being unregistered in Florida
for sales tax purposes, may not extend a valid Florida resale
certificate.

With respect to the second level of the 6 transactions, that of
the sales by Taxpayer's customer to the Florida purchaser, the
liability for the payment of Florida use tax by the Florida end
user would only occur in fact pattern 1. In fact patterns 2.,
3., 4., 5., and 6., no Florida use tax could be imposed because
each of the hypothetical Florida purchasers would be free of the
tax by reason of the purchase for resale, possession of
exemption certificates, or direct pay authority, or by the
provision of export documentation.

Having found that the above cited statutes, case law and
administrative rule provisions require the status of
registration with the State as a prerequisite to the issuance of
a valid resale certificate, the provisions of the "internal
position" you describe in your letter are not relevant to the
fact patterns posited by you, and need not be discussed.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the department only

under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist

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