Does New York tax a sale shipped from New York to an out-of-state customer, or a drop shipment, when the customer takes delivery outside New York?

Plain-English summary

Audio-Video Corporation, based in Albany, sells audio-video equipment. Its Florida sales reps fax or phone orders to Albany, and in two situations the goods reach the Florida customer without the customer ever taking possession in New York:

1. Direct shipment — equipment is shipped by common carrier from Albany directly to the Florida customer; title passes when the carrier picks it up, and Audio-Video bills the customer directly.
2. Drop shipment — the item is out of stock, so Audio-Video has an out-of-state manufacturer ship it by common carrier directly to the Florida customer; again title passes at pickup, the manufacturer bills Audio-Video, and Audio-Video bills the customer.

The Department held neither sale is subject to New York tax:

• New York's sales tax is a destination tax. The point of delivery — where possession transfers from the vendor to the purchaser (or the purchaser's designee) — controls both whether tax applies and the rate (20 NYCRR § 525.2(a)(3)).
• Delivery outside New York means no New York tax, even if title passes here. A sale is taxable where the property is delivered; a sale in which title passes in New York but delivery occurs outside New York is not taxable (20 NYCRR § 526.7(e)(1), (2)).
• Both transactions deliver in Florida, so neither is subject to New York State and local sales or use tax. Audio-Video must keep documentation substantiating the out-of-state delivery.

What this means for you

Delivery, not title, decides New York tax

New York taxes where the customer takes delivery, not where title happens to pass. If your goods are delivered to the customer outside New York — including by common carrier — the sale generally isn't subject to New York sales or use tax, even when title transfers in New York at the moment the carrier takes the goods.

Drop shipments follow the same delivery rule

Having a manufacturer ship straight to your out-of-state customer doesn't change the analysis. What matters is that the customer takes delivery outside New York; the extra link in the supply chain doesn't create a New York taxable event here.

Keep delivery documentation

The exemption depends on proving the goods were delivered out of state. Retain carrier records, shipping documents, and out-of-state ship-to addresses so you can substantiate that delivery occurred outside New York if the Department asks.

Common questions

Q: Title passed in New York when the carrier took the goods — do we owe New York tax?
A: No. New York's tax follows delivery, not title. If the customer takes delivery outside New York, the sale isn't subject to New York sales or use tax even though title passed here.

Q: Does a drop shipment from an out-of-state manufacturer change the result?
A: No. As long as the customer takes delivery outside New York, the transaction isn't subject to New York tax.

Q: What do we need to keep on file?
A: Documentation substantiating that delivery occurred outside New York — carrier and shipping records showing the out-of-state ship-to.

Citations and references

Regulations:

• 20 NYCRR § 525.2(a)(3) — the sales tax is a destination tax; the point of delivery / transfer of possession controls the tax incidence and rate
• 20 NYCRR § 526.7(e)(1), (2) — a sale is taxable where the property is delivered; a sale where title passes in New York but delivery occurs outside New York is not subject to tax

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_42s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (42)S
Sales Tax
November 14, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890712B

On July 12, 1989 a Petition for Advisory Opinion was received from Audio-Video
Corporation, 213 Broadway, Menands, New York 12204.
The issue raised is whether New York State and Local Sales or Use Tax applies to Petitioner,
Audio-Video Corporation's, sale of audio-video equipment when:
1.
Petitioner's sales representatives in the state of Florida fax or telephone an order for
audio-video equipment to Petitioner's Albany, New York location. The audio-video equipment is
shipped via common carrier from Petitioner's Albany location directly to the customer in Florida.
Title to the audio-equipment transfers to the customer at the time the equipment is picked up by the
common carrier. The customer receives a billing invoice with the equipment, payment of such bill
to be submitted directly to Petitioner.
2.
Petitioner's sales representatives in the state of Florida fax or telephone an order for
audio-video equipment to Petitioner's Albany, New York location. However, due to not having the
item in stock, Petitioner contacts the out-of-state manufacturer, instructing the manufacturer to ship
the item, via common carrier, directly to the customer in Florida. Title to the audio-video equipment
transfers to the customer at the time the equipment is picked up by the common carrier. Petitioner
receives an invoice for the equipment from the manufacturer. Petitioner subsequently bills the
customer, payment of such bill to be submitted directly to Petitioner.
Section 525.2 of the Sales and Use Tax Regulations states, in relevant part:
(a)(3) 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
...
Section 526.7 of the Sales and Use Tax Regulations states, in relevant part:
(e) Transfer of possession. (1) Except as otherwise provided... a sale is taxable at the
place where the tangible personal property... is delivered, or at the point at which
possession is transferred by the vendor to the purchaser or his designee.
Example 2:

A person, not a resident of New York State, purchases
tangible personal property in New York State and has it
delivered to his home out of state. The receipt from the sale
is not taxable in New York State as delivery was made
outside of New York State.

-2­
TSB-A-89 (42)S
Sales Tax
November 14, 1989

(2)

Except as otherwise provided..., a sale of tangible personal property, in which
title to the property passes in New York State, but in which delivery occurs
outside of New York State, is not subject to tax.

Example 6:

Corporation A and Corporation B have their headquarters in
New York State, and agree that Corporation A will purchase
all of the assets of an out-of-state division of Corporation B.
Title to the assets passes in New York State. Corporation A
starts to operate the division, and does not move any of the
tangible personal property. As delivery of the property
occurred out-of-state, the sale is not subject to tax.

In the instant transactions, 1 and 2 enumerated above, the customer takes delivery of the
audio-video equipment within the state of Florida. Inasmuch as delivery and transfer of possession
occurs outside New York State, the provisions of Section 526.7(e)(1) and (2) of the Sales and Use
Tax Regulations apply. Accordingly, the transactions are not subject to New York State and Local
Sales or Use Tax. Petitioner is to, however, maintain documentation which substantiates delivery
outside New York State.

DATED: November 14, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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