Could a Kansas-registered drop shipper accept a resale certificate from an out-of-state seller that was not registered in Kansas?

Plain-English summary

Notice 07-03 changed Kansas's resale-certificate rules for third-party drop shipments beginning July 1, 2007.

A registered Kansas seller that directed merchandise to a Kansas address still had to collect Kansas tax on a taxable sale. The ship-to address determined the local rate, even if the customer placed the order from outside Kansas. For an exempt sale, the seller needed a Kansas exemption certificate from the customer and should have had a resale certificate with its Kansas registration number on file with the drop shipper.

An unregistered seller was not supposed to bill Kansas or another state's tax on the drop shipment. If the purchase was taxable and no tax was billed, the Kansas consumer had to self-report consumers' use tax on the purchase price, including shipping charges billed as part of the sale.

The new rule allowed a Kansas-registered drop shipper to accept a resale certificate from an out-of-state seller that was not registered in Kansas. The drop shipper could accept the seller's home-state certificate or a multijurisdictional certificate such as Kansas Form ST-28M or the MTC Uniform Sales & Use Tax Certificate. A Kansas registration number was no longer required on that multijurisdictional certificate.

If the seller was not registered as a retailer in any state and could not provide a resale certificate, the Kansas-registered drop shipper had to charge Kansas tax to the seller. House Bill 2171 also repealed the former deemed-retailer rule that had made the drop shipper collect tax on an estimated retail selling price in specified cases.

The notice says it revoked and superseded all earlier Department guidance on drop shipments as of July 1, 2007. Its official catalog page now warns that underlying law may have changed and points readers to Revenue Notice 19-04 concerning nexus.

What this means for you

Out-of-state sellers using Kansas drop shippers

Provide a valid home-state or multijurisdictional resale certificate. Without registration in any state and without a certificate, the Kansas drop shipper had to charge tax to you.

Kansas purchasers

If an unregistered seller did not collect tax on a taxable drop shipment, the use-tax obligation shifted to you, including billed shipping charges.

Common questions

Q: Did the resale certificate need a Kansas registration number?
A: Not after July 1, 2007 for the out-of-state seller scenario described. A valid home-state or multijurisdictional certificate could be accepted.

Q: Which local tax rate applied when a registered seller collected tax?
A: The rate for the Kansas ship-to address.

Q: Who paid when an unregistered seller collected no tax?
A: The Kansas consumer had to self-report consumers' use tax unless the purchase was exempt.

Q: Is this still current?
A: Do not assume so. The source itself warns that nexus law may have changed and refers to Notice 19-04.

Citations and references

• 2007 House Bill 2171 — resale-certificate change and repeal of the deemed-retailer rule.
• Kansas Form ST-28M and the MTC Uniform Sales & Use Tax Certificate — multijurisdictional certificates named in the notice.
• Revenue Notice 19-04 — later nexus guidance named by the official source; described here without an invented link.

Subject

Sales and Use Taxation of Third-Party Drop Shipment

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 07-03

Original ruling text

Notice
Notice Number: 07-03
Tax Type: Kansas Compensating Tax; Kansas Retailers' Sales Tax
Brief Description: Sales and Use Taxation of Third-Party Drop Shipment
Keywords:
Approval Date: 06/13/2007

    NOTE: Underlying law may have changed. See Revenue
             Notice 19-04 concerning nexus.

Body:
KANSAS DEPARTMENT OF REVENUE
NOTICE 07-03
Sales and Use Taxation of Third-Party Drop Shipment
Office of Policy & Research --- June 13, 2007

2007 House Bill 2171 amends Kansas law to allow a drop shipper to honor a resale exemption certificate from an out-of-state seller
that is not registered as a retailer with the department. This changes how Kansas sales and use taxes apply to certain drop shipments
on and after July 1, 2007.
For purposes here, a drop shipment is a sale in which a seller accepts an order for merchandise, places the order with a third party
such as a manufacturer or wholesaler, and directs the third party to ship the merchandise to a Kansas address. The third-party
manufacturer or wholesaler is the "drop shipper." Some sellers and drop shippers that are located outside Kansas are registered to
collect Kansas retailers' sales or use tax, while others are not.

(a) Drop shipment scenarios whose tax treatment is unchanged. When a seller is a registered Kansas retailer, it is required to
charge and collect Kansas tax on the taxable sale of merchandise that it directs to be drop shipped to a Kansas address. The "ship to
address" determines which local tax to charge in addition to state tax. This destination-based sourcing requirement applies even
when the seller accepts an order from a customer that is located outside Kansas. If the sale is exempt, the seller should secure a
Kansas exemption certificate from its customer. The seller should always have a resale exemption certificate containing its Kansas
registration number on file with the drop shipper, regardless of whether the sale is taxable or exempt.
A seller that is not registered as a Kansas retailer should not bill Kansas or any other state's sales or use tax on merchandise that it
has drop shipped to a Kansas address. Whenever tax is not billed on a taxable drop shipment, the consumer is required to self report
and remit Kansas consumers' use tax on the purchase price of the merchandise, which includes any shipping charges that are billed as
part of the sale. If the consumer is a contractor, professional, retail store, or other entity located in Kansas either temporarily or
permanently, this is done by registering with the department for Kansas consumers' use tax purposes and self reporting consumers'
use tax on these types of taxable transactions. Individual Kansans may self report the consumers' use tax that they owe on their
individual income tax return. (See Line 18 of the K-40, Kansas Individual Income Tax Return).

(b) Drop shipment scenarios whose tax treatment is changed by HB 2171. Beginning July 1, 2007, a drop shipper that is a
registered Kansas retailer may honor a resale exemption certificate from an out-of-state seller that is not registered with the
department as a Kansas retailer. A drop shipper may honor a seller's resale exemption certificate from the seller's home state or a
multi-jurisdictional exemption certificate, such as the Kansas Form ST-28M or the MTC's Uniform Sales & Use Tax Certificate-
Multijurisdiction. There is no longer a requirement that a seller's multi-jurisdictional exemption certificate contain a Kansas
registration number. As with any untaxed purchase, the Kansas consumer is required to self report and remit Kansas consumers' use
tax on the purchase price unless the purchase is otherwise exempt. In the unlikely event that the seller cannot provide a resale
exemption certificate because it is not registered as a retailer in any state, a drop shipper that is a registered with Kansas is required
to charge Kansas tax to the seller for the merchandise being drop shipped to Kansas.
HB 2171 repeals the prior law that made a drop shipper that was registered with Kansas a "deemed retailer" that was responsible for
charging Kansas retailers' sales or use tax on the estimated retail selling price of the merchandise being drop shipping if the seller did
not hold a Kansas retailers' registration number and the sale was not otherwise exempt. This notice takes effect on July 1, 2007 and
revokes and supersedes all previous department of revenue notices, revenue rulings, private letter rulings, and other advice regarding
drop shipments.

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Date Composed: 06/14/2007 Date Modified: 06/14/2007

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