Webinar Slides - Payroll, HR and Tax Services

1Copyright 2008. All rights reserved. This content may not be reproduced or repurposed without written permission from ADP.

Drop Shipments and Triangulation

Wednesday, Nov. 1212-1pm EST

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Housekeeping Items

Today’s webinar will last for 60 minutes, ending at 1pm eastern time.

The last 10 minutes of today’s program have been reserved for questions & answers.

We will launch a brief survey at the conclusion of today’s webinar. Those who complete the survey will be entered into a drawing for an ADP TotalPay Debit Card, preloaded with $100 and good anywhere Visa is accepted.

For more information on the TotalPay Card and other ADP Payment Solutions, visit

adp.com

Copyright 2008. All rights reserved. This content may not be reproduced or repurposed without written permission from ADP

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To Receive CPE Credit for ADP Webinars

To receive Continuing Professional Education (CPE) credit for an ADP webinar, participants must:

Log in from the same email address that you used to register Answer 2/3 of the polling questions during the webinarStay for the entire webinar

If you meet all criteria, a certificate will be e-mailed approximately 30 days after the webinar has concluded.


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CPE Credit

Are you applying for CPE credit for today’s webinar?

A. Yes

B. No

C. Not applicable

RequirementsLog in from same e-mail address that you used to registerStay for the full hourAnswer 2/3 polling questions

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Today’s Speakers

Antonio Di BenedettoSr. Research Manager

ADP

Camilo MartinezInternational Tax Manager

ADP


Kristin KorposSr. Tax Counsel

ADP

Agenda

• What is a drop shipment?• Court cases • Resale certificates• Certificate states• Deemer states• SSTI and drop shipments• International triangulation• Conclusion• Q&A

Copyright 2008. All rights reserved. This content may not be reproduced or repurposed without written permission from ADP. 6

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Drop Shipment: Definition

• Three parties Manufacturer Retailer Customer (business or consumer)

• Two contractsManufacturer to retailerRetailer to customer

• One deliveryManufacturer ships directly to customer


Retailer

Manufacturer

Customer

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Drop Shipment


True Retailer

Manufacturer Consumer

1st S

ale

2nd SaleOut-of-State

In-State

Delivery

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Two Cases

• Evco v. Jones, 409 US 91 (1972) –Origin

In-state seller (New Mexico; selling to out-of-state buyer) cannot be taxed at origin (because the destination state “could” tax it). Manufacturer avoids home state collection responsibility, when possession/ risk of loss transfer outside the state.

• Quill v. N.D., 504 US 298 (1992) –Destination

Out-of-state seller cannot be taxed at destination. Retailer avoids collection responsibility, if it lacks “substantial physical presence” in destination state.


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Polling Question #1

What role does your business play in the drop shipment transaction?

A.Drop shipper/manufacturer

B.Out-of-state retailer

C.Customer (business or consumer)

D. Other

E. Not applicable


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Resale Certificates

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Resale Certificates

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Basic Drop Shipments: Certificate States

• Resale Certificates

State specific (Maryland)Maryland specifically requires that a retailer use Maryland’s resale certificate accompanied by a Maryland sales and use tax registration number when making a purchase for resale.

State neutral (South Carolina)South Carolina allows an unregistered seller to present an out-of-state certificate with an out-of-state sale tax license number when purchasing property for resale.

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Deemed Retailers: The “Deemer States”

Definition:

A business (in many situations the manufacturer) making a delivery for an unregistered, out-of-state retailer within a state is determined to be making a retail sale in the state.

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Deemed Retailers

True Retailer


1st S

ale

2nd SaleOut-of-State

In-State

Delivery

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Questions Raised by Deemer States

• Tax Base: Is manufacturer’s tax obligation measured by the retail price or by the wholesale price?

• Credit: If manufacturer charges retailer for the tax, can the retailer pass through a credit to the customer to reduce use tax liability?

• Exemption: If the customer has an exemption, can the customer present its exemption certificate

- to manufacturer (on delivery), or - to retailer (on contracting) to pass through to manufacturer?

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Connecticut

The delivery in this state of tangible personal property by an owner or former owner thereof or by a factor, if the delivery is to a consumer pursuant to a retail sale made by a retailer not engaged in business in this state, is a retail sale in this state by the person making the delivery. Such person shall include the retail selling price of the property in such person's gross receipts.

Connecticut General Statute § 12-407(a)(3)(a)

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Connecticut

• Connecticut law Ordinarily makes the third party in a drop shipment responsible for collecting and remitting tax. Connecticut General Statute § 12-407(a)(3)

• Purpose of the drop shipment rule in Connecticut To allow CT to obtain sales tax from a third party not otherwise a retailer, when the actual retailer is located outside of Connecticut and has no tax collection or payment obligation to the state.

• Court CaseSteelcase, Inc. v. Allan A. Crystal, Commissioner of Revenue Services., 238 Connecticut 571, 680 A2d 289 (1996)

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Massachusetts

When tangible personal property is physically delivered by an owner, any former owner thereof, a factor, or any agent or representative of said owner, former owner or factor, to the ultimate purchaser residing in or doing business in the commonwealth, or to any person for redelivery to said purchaser,pursuant to a retail sale made by a vendor not engaged in business in the commonwealth, the person making or effectuating the delivery shall be deemed the vendor of that property, the transaction shall be a retail sale in the commonwealth by such person and that person, if engaged in business in the commonwealth, shall include the retail selling price in its gross receipts, regardless of any contrary statutory or contractual terms concerning the passage of title or risk of loss which may be expressly or impliedly applicable to any contract or other agreement or arrangement for the sale, transportation, shipment or delivery of that property. He shall include the retail selling price of the property in his gross receipts.Mass. Gen. L. Chapter 64H § 1

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Massachusetts

• Massachusetts law Ordinarily makes the third party in a drop shipment responsible for collecting and remitting tax. Mass. Gen. Laws ch. 64H § 1Massachusetts drop shipment law modified in 2004, addressed loophole and passage of title issues.In Re Valley Media, Inc. (Bankruptcy court case)

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California

• California lawOrdinarily makes the third party in a drop shipment responsible for collecting and remitting tax. Cal. Code Regs. 1706, Sec. 6007, Rev. & Tax. Code.

• General ruleDrop shipper calculates the taxable retail selling price of its drop shipments based on the wholesale price plus a mark-up of 10%. However, if the drop shipper can show that a lower mark-up percentage accurately reflects the retail selling price charged by the true retailer, that lower percentage can be used.

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California

• A drop shipment can involve more than two salesWhen it does, the drop shipper is the first person who is a retailer engaged in business in California in the series of transactions beginning with the purchase by the true retailer.

• Shipments originating outside CaliforniaBy a manufacturer with California nexus Obligates manufacturer to collect Seller’s Use tax

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Polling Question #2

What are your main concerns when dealing with drop shipment transactions?

A. Under reporting tax

B. Resale certificate maintenance

C. Utilizing the proper tax base (cost price vs. sales price)

D. Understanding the varying state laws surrounding the taxability of drop shipment transactions

E. Not applicable


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Streamlined Sales Tax Agreement (SSUTA) and Drop Shipments

As of January 1st, 2008, in the case of drop shipment sales, member states must allow a third party vendor (e.g., drop shipper) to claim a resale exemption based on an exemption certificate provided by its customer/re-seller or any other acceptable information available to the third party vendor evidencing qualification for a resale exemption, regardless of whether the customer/re-seller is registered to collect and remit sales and use tax in the state where the sale is sourced.

SSUTA Section 317 (A)(8)

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SSTI and Beyond

For SSTI states, the drop shipment rule surrounding resale certificates simplifies the issue of unregistered, out-of-state retailers.

Recent states that have become full members of SST have revised their rules on drop shipment to comply with SSUTA (Kansas, Nevada, Nebraska).

States outside of SSTI with deemer/drop shipment rules (some relatively unique) face a hurdle before becoming full members of SST.

Triangulation


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Credit$20

CreditCredit$20$20

Debit$30

DebitDebit$30$30

Retailer

$ 220$ 200 cost$ 20 VAT

$ 330$ 300 cost$ 30 VAT

Cumulative Tax (VAT) @ 10%


= $10

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$ 220$ 200 cost$ 20 VAT (Credit) $ 330

$ 300 cost$ 30 VAT (Debit)

VAT in Europe – B2B – Goods

Member-State 1Company “A”

(registered in mS 1)



Member-State 2Company “B”




Consumer

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Self-assesses $ 20 in mS 2

VAT in Europe – B2B – Goods – Simplification









$ 330$ 300 cost$ 30 VAT (Debit)

Consumer

$ 220$ 200 cost$ 0 VAT(zero-rate)

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VAT in Europe – B2B – Goods Triangulation





Member-State 2Co. “B”




Member-State 3Company “C”




InvoicePhysical movement of goods

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VAT in Europe – B2B – Goods Triangulation













InvoicePhysical movement of goods

(Zero-rate)

Self-assesses in mS3 based on the purchase

price from “B”

(Zero-rate)

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Polling Question #3

How much of your business is outside of the U.S. and involves triangulation?

A. 0 to 25%

B. 25 to 50%

C. 50 to 75%

D. 75 to 100%

E. Don’t know

F. Not applicable


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Conclusion

Drop shipment laws differ considerably throughout the United States.

SSTI simplifies drop shipment transactions and resale exemption certificate issues for member states.

Drop shipment transactions will continue to pose challenges to sales and use tax collection.

For drop shipment issues and the myriad of sales and use tax issues businesses face on a daily basis, the Taxware Enterprise product from ADP provides a comprehensive software solution.

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Questions & Answers

Antonio Di BenedettoSr. Research Manager

ADP

Camilo MartinezInternational Tax Manager

ADP


Kristin KorposSr. Tax Counsel

ADP

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ADP Webinar Tour

• Next Webinar: “Sales & Use Taxes: Why Outsource?” on Wednesday, November 19, 1:00pm – 2:00pm.

• For the full calendar of ADP sales tax webinars, go to adp.com, select “Tools & Resources”, select “Events”, select “Webinars” then “Sales and Use Tax.”

• Once there, you can also listen to recordings and download slides from previous webinars.

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Webinar Slides - Payroll, HR and Tax Services