REVENUE ADMINISTRATIVE BULLETIN 1988-34
Approved: June 10, 1988

SALES AND USE TAXES - DROP SHIPMENTS

(Replaces Position Paper SUW 86-002)

RAB-88-34. The Michigan Department of Treasury has established the following guidelines for the taxability of drop shipments as defined in Acts 41 and 42 of the Public Acts of 1986, being MCL 205.54k and 205.94i of the Sales and Use Tax, respectively. These guidelines are effective March 17, 1986.

A drop shipment (or third party sale) is - A transaction where a retailer seller accepts an order from an end purchaser/consumer, places this order with a third party, and directs the third party to ship the tangible personal property directly to the end purchaser/consumer.

The following examples illustrate the applicability of sales and use taxes to various drop shipment transactions.

Example 1:

Company B takes the order, collects the money and has Company A drop-ship to Person C. If Company B has a Michigan Sales Tax license, the tax is collected and remitted by B on that order from C. [Sales Tax Act, MCL 205.52(l)]

If Company B is not registered with the Michigan Department of Treasury due to lack of nexus, Person C shall be liable for the 4% use tax on tile purchase as if it were any other purchase from out-of-state. [Use Tax Act, MCL 205.97]

If Company B is not required to be licensed to collect sales tax in Michigan, and it presents Company A with a valid sale for resale exemption certificate, Company A may be relieved of responsibility for the tax on that transaction, provided the following requirements are met:

1. Company A retains this certificate for their records (MCL 205.67, Section 17), and
   
   
2. Company A supplies the Department of Treasury with an annual information list or computer tapes containing the following:

1. The name, address and, if readily available, the federal taxpayer identification number of the out-of-state seller.
2. The name, address and, if readily available, the federal taxpayer identification number of the person to whom the tangible personal property is shipped in Michigan.

Example 2:

This is a sale in interstate commerce. No tax is due to Michigan if the Michigan company ships to the out-of-state consumer. [Specific Sales and Use Tax Rules, 1979 AC, R 205.91]

Example 3:

If Company B is not registered in Michigan for sales and use tax collection, and no Michigan tax is charged on the transaction, Person C shall be liable for the 4% Use Tax on the purchase. [Sales Tax Act, MCL 205.52(l); Use Tax Act, MCL 205.97]

Example 4:

If Company B is responsible for the billing and collecting of the purchase price, it is responsible for the collection and remittance of sales tax. [Floyd Beitzel Calendar Co. v State of Michigan, SBTA Docket No. 969]

If Company B takes the order for Company A, and Company A handles the billings and collections, it is considered a sale in interstate commerce. If Company A is not registered to collect and remit sales tax to Michigan, the 4% use tax shall be due from Person C. If Company B is acting as an authorized agent for Company A, then Company A shall be determined to have nexus in Michigan and shall be registered for sales and use tax collection and remittance. [E C Cords v Department of Revenue, SBTA Docket No. 573; W E Phillips v Department of Revenue, SBTA Docket No. 381]