In a drop-ship arrangement where an out-of-state distributor ships directly to customers, which company owes Utah sales tax: the Utah-based website operator or the out-of-state distributor?

Plain-English summary

Two companies about to enter a long-term drop-shipping arrangement wanted to know, in advance, who would owe Utah sales tax. Company A, a Nevada corporation headquartered in Utah, runs an internet website that takes retail orders, collects payment, and bears all transaction risk. But it never touches inventory: every product comes from Company B, a distributor based entirely out of state, whose warehouse ships products directly to the end customer's home — nothing passes through Utah at all. Both companies believed neither owed Utah sales tax, since the goods never entered Utah. They asked the Commission to confirm that before locking in the relationship.

The Commission's answer turned entirely on a question the request didn't fully resolve: which company is legally the seller? It laid out both possibilities.

If Company A is the seller (buying from Company B for resale, then reselling to the end customer): Company A already has Utah nexus simply from being headquartered there — property and employees in the state are enough, under National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977). So Company A must collect and remit Utah sales tax on every sale shipped to a Utah customer, regardless of the fact that the goods ship directly from Company B's out-of-state warehouse and never physically enter Utah. Meanwhile, Company B's sale to Company A is a tax-free resale under § 59-12-104(26), with proper documentation (Rule R865-19S-23) — and Company B doesn't pick up its own Utah nexus just from drop-shipping to Company A's Utah customers at Company A's request.

If Company B is the seller and Company A is really just running the storefront and taking orders on Company B's behalf: the analysis flips. The Commission drew a direct parallel to Scripto, Inc. v. Carson, 362 U.S. 207 (1960), where the U.S. Supreme Court found that hiring in-state sales representatives to solicit orders created nexus for the out-of-state principal, even though the reps weren't employees. Company A's website and order-taking function look enough like that solicitation activity that Company A would be treated as Company B's Utah representative — which means Company B, not Company A, would have Utah nexus and would need its own Utah sales tax license, collecting tax on all sales made through Company A's site.

Either way, the products' physical route (never touching Utah) turned out to be irrelevant. What controls is the legal relationship between the two companies and which one is actually selling to the end customer.

What this means for you

E-commerce businesses using drop-shipping

Don't assume that because your supplier ships straight to the customer without the goods ever passing through your home state, no one owes that state's sales tax. If you're the legal seller and you have nexus there (even just from being headquartered there), you owe the tax on the full retail sale regardless of the shipping route.

Distributors and suppliers who fulfill orders for a reseller's website

Structure and document the relationship carefully. If you're clearly selling to the reseller (who resells to the public), your sale to them can be a tax-free resale. But if the reseller is really acting as your sales agent rather than an independent buyer-and-reseller, their in-state activity can create nexus for you.

Accountants structuring multi-party e-commerce and drop-ship deals

This is a clean illustration that nexus analysis follows the legal seller, not the warehouse. Get the buy-sell documentation (resale certificates, contracts describing who bears risk of loss and who sets prices) squared away early, since that's exactly what decides which Scripto/National Geographic scenario applies.

Common questions

Q: If our products never physically enter a state, can we still owe that state's sales tax?
A: Yes, if you're the seller and you have nexus there for other reasons (like a headquarters, property, or employees) — the location of the warehouse or shipping origin doesn't change that.

Q: Does using a third party to run our website and take orders shield us from nexus?
A: Not if that party is really acting as your sales representative rather than an independent reseller — courts have found that in-state solicitation activity by a representative creates nexus for the company they represent.

Q: How do we know which scenario applies to our situation?
A: It depends on the actual legal and economic relationship — who sets prices, who bears the risk of loss, who is named as the seller to the customer, and whether the reseller buys and resells versus merely facilitates on the supplier's behalf.

Q: Can we rely on this ruling for our own drop-ship arrangement?
A: No — this is an advisory opinion addressing an unresolved ambiguity in one specific relationship. Getting your own facts and documentation reviewed is the only way to know which scenario controls for you.

Citations and references

Statutes and case law:

• Utah Code Ann. § 59-12-103(1)(a) (tax on retail sales of tangible personal property)
• Utah Code Ann. § 59-12-104(26) (resale exemption)
• Utah Admin. Rule R865-19S-23 (resale exemption documentation)
• National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977) (in-state property/employees establish nexus)
• Scripto, Inc. v. Carson, 362 U.S. 207 (1960) (in-state sales representatives create nexus for the out-of-state principal)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/02-027.html

Original ruling text

REQUEST
LETTER

02-027

Response 1/14/03

NAME

ADDRESS

PHONE

FAX

Re: Utah Tax Law Pertaining to NEXUS and paying Sales Tax

I represent a client who is a Nevada "C" corporation but is headquartered in Utah. This company has a nexus-related tax questions with the State of Utah which need clarification.

This company in Utah (I will call it company "A") owns an internet website in which they sell products to retail consumers throughout the United States and internationally online. Company "A" takes the retail customer's orders online. Company "A" collects all funds from customers and assumes all risks in the transactions.

All of the products listed in and sold on the company "A" website come from a distributor (company "B") who is based in STATE. All of the products that company "A" sells are physically located in the company "B" warehouse in STATE.

All of the company "B" products sold by company "A" are then shipped directly by and from the company "B" warehouse in STATE to the homes of the retail consumers who bought the products from company "A". None of the products sold by company "A" first come to Utah from company "B" before they go to the retail consumer's home.

It is the understanding of both company "A" and company "B" that company "B" is not required by Utah sales tax law to collect or pay Utah sales tax on any of these sales made by company "A". It is also the understanding of company "A" that they are not required by pay Utah sales tax on items they sell exclusively on the internet that are then shipped from out of the state of Utah to the buyers, whether those items are shipped to customers in Utah or to customers in any other state from outside of Utah, such as from STATE. However, because the two corporations are about to enter into a long-term business relationship, we would greatly appreciate your formal opinion on this NEXUS matter. That is, would either corporation "A" or "B" have any responsibility to collect and remit Utah sales tax under the circumstances described above?

If you need any further information in evaluating these issues, please do not hesitate to call. I look forward to your quick response, in as much as the two corporations are in a holding patterns and are wanting to be compliant with state laws with respect to these nexus issues.

RESPONSE
LETTER

January 14, 2003

NAME

ADDRESS

RE: Private Letter Ruling � Nexus Issues Arising out of Internet Sales

Dear NAME,

We have received your request for a private letter ruling concerning sales tax and nexus issues arising out of Internet sales made by a Nevada corporation that is headquartered in Utah (�Company A�). Company A owns an Internet website on which it sells products to customers throughout the United States. Once an order is received through the Internet website, the information is relayed to Company B, a company based in STATE, which ships the products directly to the customer. You have asked, under these circumstances, whether Company B must collect and remit Utah sales tax on Company A�s sales of these products.

It is unclear from the facts as stated whether Company A is considered the seller of the products, or whether Company B is the seller and Company A is acting as its representative. Before discussing each possibility, however, we will first offer some general sales tax guidance. All Utah sales made by a company with sales and use tax nexus with Utah are taxed in the same manner, whether the sale is made in person or through the use of the Internet. In addition, while the sale of tangible personal property is taxable in Utah, property purchased for resale in Utah is exempt from taxation if the original seller documents the exempt sale. Utah Code Ann. ��59-12-103(1)(a); 59-12-104(26); Utah Admin. Rule R865-19S-23.

Scenario 1: Company A is the Seller. As Company A is headquartered in Utah, we
would assume it to have nexus with Utah for sales and use tax purposes because
of the presence of property and employees in Utah. (see National Geographic
Society v. California Board of Equalization, 430 U. S. 551 (1977)). Accordingly, if Company A is the seller of
the products at issue, it must collect and remit sales tax on its sales of
items shipped or delivered to Utah locations.

With proper documentation, the sale of products from Company B to Company A would be exempt from taxation under the resale exemption, whether or not Company B had nexus with Utah. Company B would not incur sales tax nexus with Utah if its only contacts with Utah were its sales of products to Company A for resale and shipping the products directly to Company A�s Utah customers at Company A�s request.

Scenario
2: Company B is the Seller. ** If Company B
is the entity selling the products to the Internet customers, Company B�s Utah
tax liabilities are different than in Scenario 1. Based on Company A�s activities in Utah on Company B�s behalf, we
would find Company A is acting as Company B�s representative in Utah. As a result, Company B would have sales tax
nexus with Utah. In Scripto v.
Carson, 362 U.S. 207 (1960), the Supreme Court found that a company that
hired 10 sales representatives or brokers on a commission basis had sales and
use nexus in the state where the brokers were located. In that case, the brokers were supplied
catalogs, samples, and advertising materials and were actively engaged in
soliciting customers from the state where the brokers were located. In your situation, Company A maintains a
website in Utah that potential customers contact to make purchases. Company A would also be taking orders from
customers in Utah, where nexus is at issue.
Because of these similarities, we would consider Company A to be
actively engaged in Utah as a representative of Company B for the purpose of
attracting, soliciting, and obtaining Utah customers. Accordingly, it would appear, under these circumstances, that
Company B�s relationship with Company A is sufficient to impose Utah�s sales
and use tax laws on Company B.

Under Scenario 2, Utah would require Company B to obtain a Utah sales tax license and collect and remit sales tax on all taxable sales shipped or delivered to Utah locations, including those sales made by Company A on its Internet website.

In summary, either Company A or Company B should collect and remit sales tax to Utah on its Utah sales, depending on which of the two scenarios above apply to the companies� circumstances. Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

02-027