Florida Rules that Drop Shipments Not Taxable When Supplier and Retailer are Located Outside Florida
Florida ruled that the sale for resale transaction was not taxable because both parties had no in-state locations and the goods were delivered from out-of-state.
Drop shipments are a common form of sales and delivery method within a supply chain. A typical drop-ship arrangement includes three parties, the retailer, the purchaser and the supplier, and occurs when a retailer makes a sale to a buyer and then directs its supplier to ship the goods directly to the buyer via common carrier. Therefore, a drop-shipment transaction involves two “sale” transactions, one between the supplier and retailer and the second between the retailer and the buyer, but only one shipment, from the supplier directly to the purchaser.
These transactions can present some complicated sales tax issues depending on the nexus of each of the parties involved. On March 9, 2017, a Florida Administrative Law Judge (“ALJ”) issued a Final Order finding that a supplier (which is registered for Florida sales tax purposes) is not subject to Florida sales tax on a drop shipment transaction when the retailer is not located in Florida, even when the goods are shipped directly by the supplier to the purchaser in Florida. 
In this case, the taxpayer, Motion Computing, Inc., (“Motion”) was the supplier in the drop shipment transaction. Motion was based in Texas and did not have any physical locations in Florida. It did have an employee in Florida and therefore was registered as a Florida dealer for sales tax purposes. In the transactions at issue, the retailer, Advantec Computer System, Inc. (“Advantec”), sold goods to its purchaser in Florida. Advantec is based in Massachusetts, does not have Florida nexus and therefore, is not registered as a dealer for Florida sales tax purposes. Advantec then purchases those goods from Motion and directs that Motion ship the goods directly via common carrier to the purchaser in Florida. Motion billed Advantec for the goods sold to the Advantec, and Advantec invoiced its Florida customer separately.
The Department of Revenue (“Department”) claimed that the sale between Motion and Advantec was subject to Florida sales tax because the goods were ultimately delivered to Florida purchasers. The Department took the position that “every person making sales into the State of Florida is subject to sales and use tax unless specifically exempt,” and it is the dealer’s responsibility to establish that exempt status.  Since Motion is registered for Florida sales tax, it is responsible to prove any transactions are exempt. Advantec was unable to provide a Florida exemption (i.e., resale) certificate because Advantec is not required to be registered for Florida sales tax. Therefore, Motion was unable to prove with documentation that the sales to Advantec were exempt.
However, the ALJ ruled that the sale between Motion and Advantec was not a Florida sale because Motion and Advantec had no physical locations in Florida and the goods sold to Advantec were located outside of Florida. The fact that the goods were delivered by common carrier from a location outside of Florida to Advantec’s customer in Florida does not change the fact that the sale between Motion and Advantec is not a Florida sale. It is interesting to note that Motion previously received an email response from a representative of the Department reaching the same conclusion, which shows that such guidance is non-binding and that the Department may take a different position upon audit, as was the case here (even though the representative’s advice turned out to be consistent with the ALJ’s ruling). Ultimately, the only sale subject to Florida tax was the sale between Advantec and its Florida purchaser. In that case, since Advantec did not have nexus in Florida, it would not be required to collect tax, and so the purchaser would be liable to self-remit Florida use tax.
This ruling illustrates the complexity of analyzing when a company should be collecting and remitting sales and use tax in connection with drop shipment transactions. Florida is unique in that most other states would have considered the sale between the supplier and retailer to be subject to sales tax in the state where the goods are ultimately delivered. In those cases, therefore, the dispositive issue is what exemption documentation the customer state will accept to prove that the sale between the supplier and the retailer is exempt as a sale for resale.
Aprio’s SALT team has extensive experience with the sales and use tax consequences of drop shipment transactions, and we work with our clients to ensure that they remain in compliance with the applicable sales tax rules in order to minimize any potential sales tax exposure. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the April 2017 SALT Newsletter. Click here to view the full newsletter.
 Motion Computing, Inc. v. Dep’t of Revenue, DOAH Case Number: 07-2667, March 9, 2017. Apparently, a recommended order was issued in 2007 (see link above), but for some reason a final order was never issued until the Division of Administrative Appeals went through its inventory of outstanding matters. The final order can be accessed here. Thus, even though the case is ten years old, it is just being released to the public now.
 See Fla. Admin. Code Ann. 12A-1.038.
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