96-111

Response July 31, 1996

 

 

Request

May 31, 1996

 

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

 

 

March 12, 1996

 

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

 

 

July 31, 1996

 

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