96-111
Response
July 31, 1996
Request
State
Tax Commission
160
East 300 South
Salt
Lake City, UT 84134
Dear
Commissioner:
A
questionnaire dated March 12, 1996, was mailed to you on behalf of one of our
clients inquiring about the proper procedures that our client should follow to
comply with your state’s requirement to collect sales and use tax.
For
your convenience we have enclosed a slightly modified copy of the questionnaire
and request that you respond as soon as possible. If you will be unable to
provide a complete and timely response, we respectfully request you acknowledge
receipt of this inquiry and indicate when a response can be anticipated.
Thank
you in advance for your cooperation. If you have any questions or require
additional information, please contact me at XXXXX.
Sincerely,
XXXXX
State
Tax Commission
160
East 300 South
Salt
Lake City, UT 84134
Dear
Commissioner:
We
respectfully request your opinion concerning the proper procedures that our
client should follow to comply with your state’s requirement to collect sales
and use tax. Specifically, our client requests procedural guidance when our
client’s customers refuse to either pay the sales tax as charged or provide
valid exemption documentation. We ask for your response by April 15, 1996.
If
you will be unable to provide a complete response by this date, we respectfully
request you acknowledge the receipt of this inquiry and indicate when a
response can be anticipated.
FACTS
Our
client is a manufacturer, wholesaler, and retailer located principally in the
Midwest. Our client sells tangible personal property and provides services to
customers in your state and across the United States. Our client’s customers
sometimes directs our client to drop ship products to a third party in your
state. In some instances, our client’s customer is not located in your state or
registered to collect sales tax in your state. Since our client generally has
nexus in all states, it has historically charged the customer your state’s
sales tax for the drop shipments in your state. Some of our client’s customers
have refused to pay your state’s sales tax maintaining that they are exempt
from tax by reselling the products to the third party. These customers have
also refused to register with your state to collect sales or use tax asserting
that they do not have nexus.
Our
client is familiar with any tax law concerning any drop shipments in your
state, and has communicated this to their customer. Unfortunately, in many
cases, even after our client has communicated the drop shipment law to the
customer, the customer refuses to pay the sales tax.
We
are concerned that, in spite of our client’s best efforts to comply with your
state’s sales tax collection requirements, our client will be assessed the
uncollected sales tax on these drop shipments.
QUESTIONS
The
following questions request guidance regarding our client’s collection and
payment responsibility under your state’s sales and use tax laws. Please
provide a narrative response to the questions, citing any relevant laws or
regulations.
1. Please describe our client’s responsibility
to remit your state’s sales tax when its customer refuses to pay after
reasonable attempts at collection.
2. Please describe any procedures both formal
and informal that your state requires our client to follow in attempting to
collect the sales tax or obtain exemption documentation.
3. Please describe the record keeping or
documentation submission requirements required by your state indicating the
effort to collect sales or use tax or obtain valid exemption information.
4. If reasonable efforts by our client to
collect the sales tax or obtain exemption documentation fail, is the ultimate
responsibility for payment of the tax the client or the client’s customer? Is
there any ability to legally within your state’s sales and use tax laws and
regulations and enforceability shift this responsibility? If so, please
describe the procedures or indicate a citation to your state’s law or
regulation where these procedures are specified.
5.
What procedures must our client follow, e.g. amended sales and use tax returns
or claiming credit on future returns, to reflect the noncollection of sales tax
from a customer?
So
that we may follow-up with any additional questions that may arise, please
provide the following information:
Name
of Respondent
Title
Telephone
Address
City
State
Zip
We
very much appreciate your consideration and attention to this letter.
Sincerely,
XXXXX
XXXXX
Re: Advisory Opinion - Drop
Shipments
Dear
XXXXX:
We received your request letter of
May 31, 1996 along with the enclosed questionnaire. The following information should satisfy your request.
To answer your questions best, it is
necessary to discuss the structure of the Utah Sales and Use tax. Utah law levies a tax on all retail sales
within the state. Part of this law is
an exemption for property bought for resale.
See Utah Code Ann. §§ 59-12-103 and 104(28). The nature of the sale determines the taxability of the
transaction. Retail sales are taxable
while wholesale sales, or sales for resale are exempt. The Utah Use tax functions under the same
principle as the Sales tax except it applies to consumers in Utah who purchase
items from out of state. For sales tax,
the consumer pays the tax to the vendor and the vendor collects and remits the
tax to the Commission. For the use tax,
the vendor collects and remits the tax if it has some contact with our
state. If the vendor has no contact or
nexus with Utah then the consumer is required to pay the tax directly to the
Commission. See Utah Code Ann. §
59-12-107.
For convenience, this advisory
opinion will call your client “the manufacturer” and your client’s customers
“distributors.” The assumption
underlying questions one, two and three of your questionnaire is that the
manufacturer is responsible for collecting sales tax or an exemption
certificate from its distributors.
Under Utah law, when a manufacturer sells goods to its distributors for
resale, these transactions are exempt, even if the manufacturer drop ships the
goods to a third party in Utah. It is
the transaction between the distributor and the third party in Utah that is
taxable. If payment flows from the
third party in Utah directly to the distributor, the distributor is responsible
for collecting and remitting sales or use tax if it has nexus with Utah. If the distributor does not have nexus with
Utah, then the third party in Utah is responsible for remitting the use tax to
the Commission.
Although sales for resale are exempt
from the Utah Sales and Use tax, the manufacturer’s tax records will show
delivery of goods to Utah. Those
records will flag an auditor’s attention.
If the distributor is in Utah, the distributor is required to give the
manufacturer a Utah Sales tax exemption certificate. If the distributor is outside of Utah, we suggest that the
manufacturer include the distributor’s home state tax number with the sales
documents to verify the resale nature of these transactions. You indicated that some distributors are
reluctant to cooperate with the manufacturer to provide the documentation
necessary to protect the manufacturer from liability. We have no formal or informal policy to relieve the manufacturer
of liability in these cases. We suggest
that the manufacturer consider this as it structures its relationships with
these distributors.
If the manufacturer is making retail
sales to consumers in Utah, the manufacturer is responsible for collecting and
remitting Use tax on these transactions.
Again, we have no policy that relieves the manufacturer of responsibility
of collecting tax from uncooperative Utah consumers. If this situation should arise, the manufacturer should contact
us. We can probably help resolve the
dispute.
We hope that this information
satisfies your request. Please feel
free to contact us again if you have any further questions.
For the
Commission,
Alice
Shearer,
Commissioner