If I drop-ship goods into New York for an out-of-state buyer who can't give a New York resale certificate, do I have to collect New York sales tax?

Plain-English summary

Touche Ross & Co. asked, on behalf of a hypothetical importer, about a classic drop-shipment chain:

• X Company is an importer registered as a sales tax vendor in California, New York and other states.
• Buyer 1 is a Delaware corporation registered in California with no place of business or other nexus in New York.
• Buyer 2 regularly does business in New York.
• X's California office sells goods to Buyer 1 — all negotiation, billing and correspondence happen in California, and X's New York office is not involved. Buyer 1 then resells to Buyer 2, and at Buyer 1's request X ships the goods by common carrier from outside New York straight to Buyer 2 in New York. The X–Buyer 1 contract is C.I.F. (under UCC 2-320, delivery to the carrier is treated as delivery to the buyer for risk and title); the Buyer 1–Buyer 2 sale is F.O.B. the New York delivery point, where risk and title pass to Buyer 2.

X Company asked whether it must collect and remit New York sales and use tax.

The Department said yes.

• Sales tax is a "destination tax." The point of delivery — where the vendor transfers possession to the purchaser or the purchaser's designee — controls both whether tax applies and the rate (20 NYCRR 525.2(a)(3)).
• Delivery here is in New York. X (the vendor) delivers the goods to Buyer 1's designee, Buyer 2, in New York. That is a New York-taxable delivery.
• No resale certificate, so tax is due. Under § 1132(c), every sale is presumed a taxable retail sale unless the vendor gets a properly completed resale certificate, and only a purchaser registered as a New York vendor can issue one (20 NYCRR 532.4). Buyer 1 is not registered in New York and cannot give one. So X must collect New York state and local tax from Buyer 1 at the rate in effect where Buyer 2 takes delivery.
• C.I.F. does not help. The C.I.F. term exists to protect the seller against a buyer's rejection at a distant port; UCC 2-320's rule that delivery to the carrier is delivery to the buyer does not control sales and use tax liability.
• A warehouse delivery is the same. If Buyer 1 instead had the goods delivered to a New York public warehouse, the delivery point would still be in New York, so X would still collect — at the rate where the warehouse is located (20 NYCRR 526.7(e)(1)).

What this means for you

In a drop-shipment, the shipper can be the one who owes New York tax. If you are a registered New York vendor and you deliver goods into New York for your out-of-state customer, New York's destination rule can put the collection duty on you — even though you never dealt with the ultimate recipient and your sale was negotiated out of state.

A resale certificate is the escape hatch — but only a registered buyer can hand you one. The middle buyer avoids tax on your invoice by giving you a valid New York resale certificate, and it can only do that if it is registered as a New York vendor. A customer with no New York nexus and no registration cannot, so you must collect.

Shipping terms don't override the destination rule. C.I.F., F.O.B., or a UCC provision about when title passes to the carrier will not move the taxable event out of New York. What matters for sales tax is where the goods are actually delivered.

Delivering to a New York warehouse is still a New York delivery. Routing the goods to an in-state warehouse instead of the customer does not avoid the tax; it just changes the applicable local rate to the warehouse's location.

Common questions

Q: My sale was negotiated and billed entirely out of state. Why do I owe New York tax?
A: Because sales tax follows the destination. You delivered the goods to your buyer's designee in New York, so the New York delivery — not where you negotiated — controls, and you must collect absent a valid resale certificate.

Q: How can I avoid collecting on a drop-shipment?
A: Get a properly completed New York resale certificate from your buyer. Only a buyer registered as a New York vendor can issue one; a buyer with no New York registration cannot, so you would have to collect.

Q: Does a C.I.F. or F.O.B. term change who owes the tax?
A: No. Contract shipping terms and the UCC rule that delivery to the carrier is delivery to the buyer do not control sales and use tax liability. The actual point of delivery in New York governs.

Q: What if the goods go to a New York public warehouse instead of the customer?
A: The delivery point is still in New York, so the vendor still must collect — at the local rate where the warehouse is located.

Citations and references

Statute:

• Tax Law § 1105(a) — taxes receipts from every retail sale of tangible personal property
• Tax Law § 1110 — imposes use tax on property used in New York unless already subject to sales tax
• Tax Law § 1132(c) — presumes every sale is a taxable retail sale absent a resale certificate

Regulations:

• 20 NYCRR 525.2(a)(3) — sales tax is a "destination tax"; the point of delivery controls the tax incident and rate
• 20 NYCRR 532.4(c),(d) — a resale certificate may be issued only by a purchaser registered as a New York vendor
• 20 NYCRR 526.7(e)(1) — delivery to a New York public warehouse is a New York delivery

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_3s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(3)S
Sales Tax
January 9, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S841109A

On November 9, 1984 a Petition for Advisory Opinion was received from Touche Ross &
Co., 1633 Broadway, New York, New York 10019.
Petitioner describes a hypothetical situation involving the sale of goods by an importer
registered as a sales tax vendor in New York State and inquires as to the sales and use tax obligations
and liabilities of such importer.
X Company, an importer of manufactured goods, has an office and is registered to do
business in California, New York and other states throughout the United States.
Buyer 1 is a Delaware corporation registered to do business in California but does not
maintain a place of business in, and has no other nexus with, New York.
Buyer 2 is a corporation which regularly conducts business in New York through its New
York office.
X Company, Buyer 1 and Buyer 2 are unrelated parties and are not subject to an agency
relationship.
The California office of X Company sells goods to Buyer 1. Negotiations for the sale,
including the purchase price, terms of delivery, credit, terms of payment, billing and other
correspondence are conducted entirely by X Company and Buyer 1 in their California offices. X
Company's New York office is not involved in any facet of the transaction.
Subsequent to the sale by X Company, Buyer 1 sells the goods to Buyer 2. At the request
of Buyer 1, X Company ships the goods via common carrier from their initial location outside of
New York to Buyer 2 inside New York. The contract between X Company and Buyer 1 requires the
goods to be shipped under a C.I.F. arrangement. Section 2-320 of the Uniform Commercial Code
defines C.I.F. to mean an arrangement whereby the contract price includes the cost of the goods and
the insurance and freight to the named destination. Delivery of the goods to the common carrier is
deemed to be delivery to the buyer for purposes of risk and title. The sale from Buyer 1 to Buyer 2
is shipped Free on Board (F.O.B.) at the New York delivery point such that both risk of loss and title
pass to Buyer 2 in New York.
Petitioner inquires whether X Company is required to collect and remit the New York sales
and use tax with regard to the above transaction.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property with certain exceptions.
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-86(3)S
Sales Tax
January 9, 1986

Section 1110 of the Tax Law imposes a use tax on the use within New York State of tangible
personal property, except to the extent such property has already been subject to sales tax.
Section 1101(b)(4)(i) of the Tax Law defines the term "retail sale" to include "[a] sale of
tangible personal property to any person for any purpose, other than (A) for resale as such. ..."
Section 1101(b)(5) of the Tax Law defines the term "sale", in pertinent part, as "[a]ny transfer
of title or possession or both. . . in any manner or by any means whatsoever for a consideration. ..."
In accordance with Section 1132(c) of the Tax Law, all sales are deemed to be taxable sales
at retail unless the vendor has received a properly completed resale certificate from the purchaser.
In order to issue such a certificate, the purchaser must be registered with the New York State
Department of Taxation and Finance as a vendor. (20 NYCRR 532.4(c) and (d)).
In describing the nature of the sales tax, the Sales and Use Tax Regulations state in part:
"The sales tax is a 'destination tax', that is, the point of delivery or point at which possession is
transferred by the vendor to the purchaser or designee controls both the tax incident and the tax
rate. ..." (20 NYCRR 525.2(a)(3)). In other words, a sale is taxable at the place where the tangible
personal property is delivered or the point at which possession is transferred by the vendor to the
purchaser or his designee.
In the instant case, the manufactured goods are being delivered by the vendor (X Company)
to the purchaser's (Buyer 1) designee (Buyer 2) in New York State. Absent the receipt of a properly
completed resale certificate, X Company is required to collect the New York State and local sales
and use tax from Buyer 1 at the tax rate in effect where delivery is made to Buyer 2.
Petitioner's reliance on the provisions of the C.I.F. contract to relieve X Company of its
obligation to collect the tax from Buyer 1 is misplaced. The purpose of the C.I.F. contract ". . .is to
give the seller protection against the buyer's unjustifiable rejection of the goods at a distant port of
destination which would necessitate taking possession of the goods and suing the buyer there."
(Comment 12. to UCC 2-320). The Provision of UCC 2-320, regarding delivery of the goods to
the common carrier being deemed delivery of the goods to the buyer, is not controlling in
determining sales and use tax liability.

-3­
TSB-A-86(3)S
Sales Tax
January 9, 1986

Petitioner also inquires whether the requirement to collect and remit tax would change if
Buyer 1 were to request delivery of the goods to a public warehouse in New York rather than being
delivered to Buyer 2. Inasmuch as the point of delivery would still be in New York State, X
Company would still be required to collect the New York State and local sales and use tax from
Buyer 1. The tax would be required to be collected at the State and local rate in effect where the
warehouse is located. (20 NYCRR 526.7(e)(1)).

DATED: January 9, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.