Missouri Letter Rulings Clarify Sales Tax Obligations of Online Retailers That Drop Ship
Drop shipping is a mainstay in ecommerce because of its logistical and financial benefits for online retailers. However, the business method can be problematic from a sales and use tax perspective, especially when transactions involve parties in multiple states. The issue is always over who has the obligation to collect and pay the appropriate sales tax on a purchase. Is it the online retailer or is it the drop shipping company that fulfills the order? Recent Missouri letter rulings put out-of-state retailers on notice that they could have an obligation to collect sales tax, even if their drop shipping orders into Missouri do not exceed the $100,000 threshold.
The Missouri Department of Revenue’s Letter Rulings 8214 & 8232
In the past year, the Missouri Department of Revenue has released two private letter rulings in response to questions from online retailers about their drop shipping transaction. While letter rulings are limited to the specific facts presented and are not without flaw, they do provide valuable insight into the position and mindset of revenue departments on complex sales and use tax topics. You can leverage these insights to mitigate the risk of a sales tax audit or avoid surprises when working a Department on an assessment or refund issues.
Letter ruling 8214 involved an out-of-state online vendor that sold manufactured products to customers in Missouri. The vendor drop shipped the products directly from the manufacturer to the customer. A few months later, the department issued letter ruling 8232, another out-of-state vendor sold print and promotional items designed by customers. The designs would go to the vendor’s wholesaler for printing and shipping directly to the customer. In both cases, the vendors claimed to have Missouri sales of less than the state’s $100,000 threshold for remote sellers.
The practice of holding the vendor responsible for collecting sales tax in a drop shipping transaction is not uncommon since they already collect payment information from the end-consumer. However, the Missouri Department of Revenue’s position is noteworthy because it seemingly contradicts its policies for remote sellers and marketplace facilitators which requires collection and remittance of tax when retail sales in Missouri exceed the $100,000 in a calendar year. See Remote Seller and Marketplace Facilitator FAQs.
Despite the Department’s position, it’s unclear how a case might resolve if a business were to dispute a sales tax assessment for drop shipping transactions because it claims to be short of the economic nexus threshold. Again, letter rulings are not irrefutable law but are Department interpretations based on a limited set of facts.
The Takeaway for Online Retailers and Drop Shipping Companies
Online retailers and drop shipping companies, alike, need to take extra precautions when managing the sales and use tax implications of their sales. You need to confirm:
(1) The rules of the state where your business has physical operations and nexus.
(2). The rules of the state where you deliver tangible personal property to customers.
(3). The terms of arrangements with your third-party supplier or vendor on administering sales tax compliance.