If I ship merchandise directly to a Utah customer on behalf of a foreign reseller I sold it to, do I have to collect Utah sales or use tax?

Plain-English summary

An out-of-state vendor (registered to collect Utah sales tax) asked the Utah State Tax Commission how sales tax applies to a drop-shipment arrangement: the vendor sells merchandise to a customer in a foreign country ("Company A"), who resells that merchandise to its own customer located in Utah ("Customer B"). Rather than shipping to Company A first, the vendor ships the merchandise directly to Customer B in Utah. The vendor bills Company A, and Company A bills Customer B separately. Company A has no nexus with Utah and is not registered to collect Utah sales tax. The vendor asked whether it was required to collect sales or use tax on these drop-shipped sales made on behalf of its foreign customer.

The Commission ruled that the vendor's sale to Company A is a sale for resale, not a taxable retail sale. Because Company A buys the merchandise to resell it to Customer B (the final consumer), the vendor does not have to collect or remit Utah sales or use tax on that sale — provided it obtains a properly completed exemption certificate from Company A. And because Company A itself has no nexus with Utah and isn't registered to do business there, Utah cannot require Company A to collect and remit sales tax either. The Commission noted that even if Company A did turn out to have Utah nexus, the vendor would still have no sales tax liability on the transaction as long as it held a valid exemption certificate from Company A.

To document the exempt resale, the Commission's stated policy required the vendor to have Company A complete a Utah sales tax exemption certificate (Form TC-721), noting Company A's status as a foreign corporation and including additional information about its location. As an alternative, the vendor could instead keep on file a letter from Company A stating that Company A has no Utah nexus for sales tax purposes and that its purchases from the vendor are for resale. Either way, Rule 23 also required the vendor to retain a copy of the sales invoice identifying Company A.

The ruling closes with an important footnote: even though neither the vendor nor Company A owes sales tax on this transaction, Customer B — as the final consumer receiving the goods in Utah — is required to directly report and pay Utah use tax on the purchase.

What this means for you

Drop-shippers and out-of-state vendors selling to resellers

If you ship merchandise directly to a reseller's customer rather than to the reseller itself, the key question is whether your sale to the reseller is a genuine sale for resale. If it is, and you hold a valid resale/exemption certificate from your reseller-customer, you generally don't have to collect Utah sales or use tax on that sale — even though the goods physically land with the reseller's customer in Utah, and even if your reseller-customer itself has no Utah nexus and can't be made to collect tax.

Retailers using third-party fulfillment or drop-shipping vendors

If you're the reseller in a drop-ship chain (buying from a vendor who ships straight to your customer) and you have no Utah nexus, Utah cannot compel you to register or collect sales tax on your resale to your Utah customer. But that doesn't make the transaction tax-free — your customer, as the final consumer, becomes responsible for self-reporting and paying Utah use tax directly on the purchase.

Accountants and tax professionals

The paperwork matters as much as the substance here. To support the resale exemption, the Commission's stated policy calls for a completed Form TC-721 from the reseller (with added detail if the reseller is a foreign entity), or alternatively a letter from the reseller attesting to its lack of Utah nexus under § 59-12-107 and that the purchase is for resale. Either way, Rule 23 requires retaining the underlying sales invoice identifying the reseller. Advise drop-shipping clients to collect and retain this documentation before treating a sale as exempt.

Common questions

Q: I sell to a foreign reseller and ship directly to their Utah customer. Do I have to collect Utah sales tax?
A: Not if the sale to the reseller is genuinely for resale and you obtain a properly completed Utah exemption certificate (or equivalent documentation) from the reseller. The Commission ruled that such a vendor is not responsible for collecting tax on the resale sale or on the drop shipment itself.

Q: What if my reseller-customer actually does have Utah nexus?
A: According to the ruling, the vendor still has no sales tax liability on the transaction as long as it received a properly completed exemption certificate from the reseller.

Q: What documentation do I need to support the resale exemption?
A: The Commission's policy at the time called for a Utah sales tax exemption certificate (Form TC-721) completed by the reseller, with additional detail if the reseller is a foreign corporation — or alternatively, a letter from the reseller stating it has no Utah nexus under § 59-12-107 and that its purchases are for resale. Rule 23 also requires keeping a copy of the sales invoice showing the reseller's identity.

Q: Does anyone end up owing Utah tax on this sale?
A: Yes. The ruling's footnote makes clear that the Utah customer who receives the goods (the final consumer) must directly report and pay Utah use tax on the purchase, even though neither the vendor nor the foreign reseller is required to collect it.

Q: Can I rely on this ruling for my own drop-shipping business?
A: Not directly. A Utah private letter ruling binds the Commission only for the taxpayer and facts it was issued to. It shows how the Commission reasons about resale sales and drop shipments, but you should confirm your own facts — and current law, since this ruling is from 2002 — with a tax professional or the Commission.

Citations and references

Statutes and rules (as cited in the 2002 ruling; may have been renumbered since):

• Utah Code Ann. § 59-12-107 — governs nexus and the duty to collect and remit Utah sales and use tax; referenced as the basis for a reseller's statement that it has no Utah nexus
• Utah Admin. Rule "Rule 23" (recordkeeping for exemption/resale certificates) — requires retaining a copy of the sales invoice showing the reseller's name and identity, in addition to the exemption certificate
• Form TC-721 — the Utah sales tax exemption certificate used to document a sale for resale

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/02-010.htm

Original ruling text

REQUEST LETTER

02-010

NAME

ADDRESS

Re: Applicability of Utah State Sales and Use Tax to Drop Shipments

Our company is an out-of-state vendor that is licensed to do business in Utah. We have a customer located in a foreign country that purchases merchandise from us and resells the merchandise to their customers in the state of Utah. We ship the merchandise purchased by this customer directly to their Utah customers. Our billing is sent to the foreign customer who bills their own customers accordingly. The foreign customer does not have nexus in Utah and is not registered to do business in Utah.

We hereby request a ruling with regard to the tax treatment of the drop shipments made in behalf of our foreign customer. Are we required to collect sales or use tax for this foreign reseller?

Would you please respond to COMPANY, ADDRESS. If you have any questions relating to this matter, please contact me at PHONE or send an email to EMAIL ADDRESS.

RESPONSE LETTER

April 25, 2002

NAME

ADDRESS

Re: Sales and use tax on drop shipments

Dear NAME,

Your letter addresses whether COMPANY is required to collect sales or use tax on sales of merchandise to a foreign reseller when COMPANY is the party who ships the merchandise directly to the reseller�s customers in Utah.

According to your letter, COMPANY sells its merchandise to another company (�Company A�) that is located in a foreign country. However, COMPANY does not ship the merchandise to Company A. Instead, it ships the merchandise directly to Company A�s customer (�Customer B�), who is located in Utah. Both COMPANY and Company A are located outside of Utah. COMPANY is registered with Utah to collect and remit sales tax to Utah. Because of your statement in your letter, we assume Company A does not have nexus with Utah and, thus, is not required to be registered to collect and remit sales tax.

We also assume that Customer B is the final
consumer. Under these circumstances, the sale from COMPANY to Company A is
a sale for resale. COMPANY receives a sale for resale certificate and is
not responsible to collect sales or use tax on the sales made by Company A.
In addition, since Company A is not registered and appears not to have nexus
with Utah in its business relationships, Utah is not able to require it to
collect and remit sales and use tax. Under these circumstances neither COMPANY
nor Company A would be required to collect and remit Utah sales tax on this
transaction.[1] Even should Company A in fact have nexus with Utah,
COMPANY still has no sales tax liability if it receives a properly completed
exemption certificate from Company A.

To document your exempt sale to Company A, our current policy requires that you have Company A complete a Utah sales tax exemption certificate (Form TC-721, copy attached) indicating that its purchases from COMPANY are for resale. Since Company A is a foreign corporation, this should be included on the certificate and any additional information regarding the location of Company A should be attached. COMPANY should retain this document in its records as evidence of the exempt sale. However, as an alternative, COMPANY may keep on record a letter from Company A stating that Company A has no nexus with Utah for sales tax purposes under Utah Code Ann. �59-12-107 (copy attached) and that items purchased by Company A from COMPANY are intended for resale. In addition to the exemption certificate, Rule 23 also requires that you keep a copy of the sales invoice showing the name and identity of Company A.

Accordingly, COMPANY is not required to collect and remit sales for the sales of merchandise to Company A as long as it follows the above-mentioned requirements THOMPSON may have nexus with Utah in other transactions, but this nexus does not impute the responsibility to collect tax by COMPANY on sale for resale transactions or on third party drop shipments, as described in your letter, where COMPANY is not the final seller.

Please contact us if you have any further questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/PL

02-010

[1] However, Customer
B would be required to directly report and pay to the Tax Commission the Utah
use tax that is due on the sale.