When a manufacturer sells to an out-of-state wholesaler who then has the goods drop-shipped directly to a Utah customer, is the manufacturer's sale to the wholesaler taxable, and what documentation does Utah accept to exempt it?

Plain-English summary

A tax administrator for a computer printer manufacturer and wholesaler (registered to collect Utah tax) asked the Commission how to handle a common drop-shipment arrangement: the manufacturer sells a printer to a wholesaler (W) who isn't registered or resident in Utah; on W's instructions, the manufacturer ships the printer directly to W's customer (C) in Utah, with the order accepted and shipped FOB origin outside Utah.

The Commission answered the five questions asked:

1. Is the manufacturer's sale to W taxable in Utah? No -- it's a sale for resale, not subject to sales tax.
2. What documentation is required? The manufacturer should hold a sales tax exemption certificate from W.
3. Will Utah accept a resale certificate bearing W's home-state (or another state's) registration number, even though W isn't registered in Utah? Yes.
4. Can a contract between the manufacturer and a manufacturer/distributor substitute for an exemption certificate (relevant since 75% of the taxpayer's sales go to OEMs/distributor-resellers under contract)? No -- a contract is not an acceptable replacement for an actual exemption certificate.
5. Does it matter if the ultimate customer (C) is an exempt entity like the federal government? No -- the taxable transaction being analyzed is between the manufacturer and its wholesaler (W), not between the manufacturer and C, so C's exempt status is irrelevant to this sale.

What this means for you

Manufacturers and wholesalers doing multi-state drop shipments

The key compliance step is paperwork, not geography: get an actual resale exemption certificate from your wholesale customer, even one showing only an out-of-state registration number. Don't rely on a distributor contract alone, however comprehensive -- Utah requires the certificate itself, per this ruling.

Distributors and resellers issuing exemption certificates

If you buy from a Utah-registered manufacturer for resale and aren't registered in Utah yourself, this ruling supports using your home-state registration number on the resale certificate you provide.

Accountants documenting resale-chain sales

Two traps this ruling flags explicitly: (1) a sales contract, however detailed about resale intent, doesn't substitute for a proper exemption certificate; and (2) the tax-exempt status of the end customer down the drop-shipment chain doesn't matter to the seller-to-wholesaler leg of the transaction -- each link in the chain is analyzed on its own facts and documentation.

Common questions

Q: Is a manufacturer's sale to an out-of-state wholesaler who arranges drop shipment into Utah taxable?
A: No, per this ruling -- it's an exempt sale for resale, so long as the manufacturer has a resale exemption certificate from the wholesaler.

Q: Will Utah accept a resale certificate with an out-of-state registration number?
A: Yes, per this ruling, even though the wholesaler is unregistered in Utah itself.

Q: Can a distributor contract replace an exemption certificate?
A: No -- this ruling states a contract is not an acceptable substitute, even where most of the taxpayer's business runs through such contracts.

Q: Does it matter if the final drop-ship recipient is tax-exempt (e.g., a government entity)?
A: No, per this ruling -- the analysis focuses on the manufacturer-to-wholesaler sale, not on who the wholesaler's customer turns out to be.

Q: Can another drop-shipment seller rely on this ruling directly?
A: Not automatically -- it binds the Commission only for the taxpayer and the specific facts presented. Different documentation or contractual structures would need their own analysis.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/92-025.pdf

Original ruling text

Response
June 30, 1992

June
30, 1992

XXXXX

Re:
Third Party Drop Shipments

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling to
determine the taxability of third party drop shipment sales and the
documentation the seller is required to keep.

1.
The Taxpayer's sale to a wholesaler (W) is not subject to sales tax. It is a
sale for "resale."

2.
The taxpayer should have a sales tax exemption certificate from the wholesaler.

3.
Utah will accept an exemption certificate with another states' registration
number on it for third party drop shipment sales.

4.
A contract between the taxpayer and a manufacturer or distributor is not an
acceptable replacement for a sales tax exemption certificate.

5.
It does not make a difference if the third party customer is an exempt entity.
The transaction is between the taxpayer and his wholesaler (W).

For
the Commission,

Joe
B. Pacheco

Commissioner

Utah
State Tax Commission

XXXXX

Managing
Auditor

160
E. Third So., 5th Floor

Salt
Lake City, UT 84134

SUBJECT:
Third Party Drop-Shipments.

Gentlemen:

We
request written documentation for the proper Sales & Use Tax treatment for
the following situation, in order to exempt the sale from tax:

XXXXX(Taxpayer),
a computer printer manufacturer and wholesaler, is registered to collect tax in
your state.

Taxpayer
sold a printer to wholesaler, W (not registered nor resident in your state). Taxpayer,
upon instructions from W, shipped the printer to C, a customer of W, located in
your state. W is registered to collect tax only in its home state, which is not
your state. The sales order was accepted outside your state and shipped FOB
origin at Taxpayer�s plant located outside your state.

1)
Is the taxpayer sale to W considered a sale subject to sales tax in your state?

2)
If the taxpayer sale to W is taxable in your state, what documents are
necessary to exempt the sale from tax?

3)
If W provides a Resale Certificate with its home (or another) state
registration number on it, will your state accept the certificate?

The
nature of taxpayer's business is such that 75% of total sales are made to
either original equipment manufacturers (OEM) or distributor resellers, who
purchase taxpayer product under contract for re-sale. Is this taxpayer contract
with reseller an acceptable alternative document to exempt the sale from tax?

5)
Does it make a difference if C is an "exempt by nature" entity, such as
the Federal government?

Please
forward your written response at your earliest convenience to my attention.

Sincerely,

XXXXX

Tax
Administrator