Taxes - M.56 Are retailers who drop ship products from suppliers to customers within and outside of Michigan entitled to deduct the cost of these items from gross receipts as purchases from other firms?

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M56. Are retailers who drop ship products from suppliers to customers within and outside of Michigan entitled to deduct the cost of these items from gross receipts as purchases from other firms?

A drop shipment (or third party sale) is a transaction where a seller (taxpayer) accepts an order from an end user purchaser. The seller places this order with a third party supplier and directs the third party to ship the property directly to the end user. In such an arrangement the seller generally does not hold an inventory of the goods for resale.

"Purchases from other firms are deducted from a taxpayer's gross receipts to calculate the modified gross receipts tax base. 208.1203(3) Purchases from other firms includes inventory purchased for resale. 208.1113(6) For retailers and wholesalers, inventory generally is defined by statute as, "the stock of goods held for resale in the regular course of trade of a retail or wholesale business, including electricity or natural gas purchased for resale." MCL 208.1111(4)(a) Inventory excludes personal property under lease or principally intended for lease rather than sale and property allowed a deduction or allowance for depreciation or depletion under the internal revenue code. 208.1111(4)(e)

If the facts and circumstances indicated that the property drop shipped constitutes the taxpayer's inventory as defined by statute, the cost of those items may be deducted as "purchases from other firms." Relevant facts for this inquiry include whether the drop shipped property appears on the taxpayer's books and records as inventory.