Did a North Carolina manufacturer owe South Carolina use tax when it sold equipment wholesale to an unregistered out-of-state distributor and drop-shipped it to the distributor's South Carolina customer?

Plain-English summary

South Carolina Private Letter Ruling 88-2 concluded that a North Carolina manufacturer did not owe South Carolina use tax when it sold equipment to an out-of-state distributor for resale and shipped the equipment directly to the distributor's South Carolina customer.

The manufacturer's sale to the distributor was a wholesale sale. The ruling therefore placed use-tax liability on the purchaser in the South Carolina retail transaction rather than on the manufacturer making the drop shipment.

The three-party transaction

XYZ manufactured equipment in North Carolina and was authorized to collect South Carolina use tax.

Sometimes an out-of-state distributor sent XYZ an order for a South Carolina customer. XYZ shipped the equipment directly to that customer, invoiced the distributor at a wholesale price, and received payment from the distributor. The distributor separately invoiced its customer at a retail price that XYZ did not know.

The ruling defined a drop shipment as goods sent directly from a manufacturer to the consumer to fill an order for a dealer or distributor.

Why XYZ's sale was wholesale

Section 12-35-170 defined a wholesale sale as a sale of tangible personal property by a wholesaler to a retail merchant, jobber, dealer, or other wholesaler for resale, rather than a sale to a user or consumer.

XYZ sold the equipment to the out-of-state distributor, which then resold it to the South Carolina customer. The Commission therefore classified XYZ's transaction as a wholesale sale and concluded that it was not subject to use tax.

XYZ's physical delivery of the equipment to the distributor's customer did not change the classification of XYZ's sale on the stated facts.

Who owed the use tax

Section 12-35-810 imposed use tax on tangible personal property purchased at retail for storage, use, or consumption in South Carolina, regardless of whether the retailer was engaged in business in the state.

Because the distributor was not an authorized use-tax collector and XYZ's transaction was wholesale, the ruling concluded that the purchaser in the retail transaction was liable for the use tax.

What this means for you

Manufacturers making drop shipments

PLR 88-2 separated the manufacturer's wholesale sale from the distributor's retail sale. Direct delivery to the end customer did not by itself make the manufacturer's transaction retail.

Out-of-state distributors

The distributor bought at wholesale and billed the South Carolina customer at retail. The ruling's conclusion did not say that the distributor's lack of registration made the retail purchase tax-free; it placed use-tax liability on the purchaser.

South Carolina customers

Receiving goods directly from the manufacturer did not eliminate use tax. The ruling treated the customer's acquisition as the South Carolina retail purchase subject to purchaser liability.

Accountants and tax professionals

The invoices and resale chain were important. XYZ billed the distributor at wholesale, while the distributor billed the customer at a separate retail price unknown to XYZ.

Readers applying the ruling today

PLR 88-2 applied 1988 law. Current nexus, registration, collection, marketplace, resale-certificate, drop-shipment, and purchaser-use-tax rules must be checked before applying its allocation of responsibility today.

Common questions

Q: Did the manufacturer owe use tax merely because it shipped into South Carolina?

A: No. On these facts, the manufacturer's sale to the distributor was wholesale and not subject to use tax.

Q: Did it matter that XYZ was authorized to collect South Carolina use tax?

A: The ruling stated that XYZ was an authorized collector but still held its wholesale sale not subject to use tax.

Q: Who made the retail sale?

A: The out-of-state distributor bought from XYZ at wholesale and separately invoiced the South Carolina customer at retail.

Q: Who was liable for use tax under the ruling?

A: The purchaser in the South Carolina retail transaction was liable under section 12-35-810.

Q: Did XYZ need to know the distributor's retail price?

A: The ruling noted that the distributor's retail price was unknown to XYZ and nevertheless treated XYZ's own invoice and payment as a wholesale transaction.

Q: Can another manufacturer rely on PLR 88-2?

A: No. The ruling states that it applied only to XYZ's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-35-170 (1976) — wholesale-sale definition
• S.C. Code section 12-35-810 (1976) — use tax on tangible personal property purchased at retail for use in South Carolina
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR88-2.pdf

Original ruling text

SC PRIVATE LETTER RULING #88-2

TO:

XYZ, Inc.

SUBJECT:

Use Tax - Drop Shipments by Manufacturers

REFERENCE:

S.C. Code Ann. Section 12-35-170 (1976)
S.C. Code Ann. Section 12-35-810 (1976)
S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

AUTHORITY:

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
Is an out-of-state manufacturer liable for payment of the use tax on tangible personal property
drop shipped to an out-of-state distributor's South Carolina customer?
Facts:
XYZ, Inc. is an equipment manufacturer located in North Carolina and an authorized collector of
the South Carolina use tax. At times, the company fills orders for distributors located outside
South Carolina, which are not authorized collectors of the use tax. XYZ invoices and receives
payments from such distributors at wholesale prices and the distributors invoice their customers
at retail prices unknown to XYZ.
Discussion:
A "drop shipment" is a shipment of goods directly from a manufacturer to the consumer to fill an
order for a dealer or distributor.
South Carolina Code Section 12-35-170 reads in part:
The terms 'wholesale sale' and 'sale at wholesale' mean a sale of tangible personal
property by wholesalers to licensed retail merchants, jobbers, dealers or other wholesalers
for resale, and do not include a sale by wholesalers to users or consumers, not for resale.
1

South Carolina Code Section 12-35-810 reads in part:
An excise tax is imposed on the storage, use or other consumption in this State of
tangible personal property purchased at retail for storage, use, or other consumption in
this State...., regardless of whether the retailer is or is not engaged in business in this
State.
Conclusion:
The sales by XYZ to out-of-state distributors are "wholesale sales", pursuant to Code Section 1235-170, and therefore, are not subject to the use tax. The purchaser in this case is liable for the
use tax pursuant to Code Section 12-35-810.

SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman
s/John M. Rucker
John M. Rucker, Commissioner
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
January 27
, 1988

2