Tennessee – Drop Shipment Transactions

SALT Report 1348 – The Tennessee Department of Revenue issued a letter ruling regarding the taxability of drop-ship transactions.  Drop shipment delivery generally means the shipment of goods from a manufacturer or supplier directly to the customer of an intermediate supplier.  If a Tennessee registered dealer sells goods to an unregistered, out-of-state dealer, but delivers the goods directly to the out-of-state dealer’s customer in Tennessee, the Tennessee registered dealer will be liable for sales tax except as provided below.

Resale Certificate From an Out-of-State Customer

The Taxpayer may accept a Tennessee resale certificate or a fully completed Streamlined Sales and Use Tax Certificate of Exemption, which must include a Tennessee exemption number, from an out-of-state customer who is registered for sales tax in Tennessee.  TENN. CODE ANN. § 67-6-102(77)(A) requires that all “sales for resale” be in strict compliance with the rules and regulations promulgated by the Commissioner of Revenue.

Therefore, if the Taxpayer’s customer is registered for Tennessee sales/use taxes and presents a valid Tennessee resale certificate or fully completed Streamlined Sales and Use Tax Certificate of Exemption, which must include a Tennessee exemption number, the Taxpayer may accept the certificate and make a tax-exempt sale under the certificate, regardless of where the customer is located.

Drop Shipment to a Customer of the Purchaser who is a Dealer

If a registered dealer purchases products from the Taxpayer with a Tennessee resale certificate or a fully completed Streamlined Sales and Use Tax Certificate of Exemption, that has a Tennessee exemption number, and has the Taxpayer drop ship the products to the dealer’s customer in Tennessee, then the sale by the Taxpayer to the dealer is exempt from the Tennessee sales and use tax as a sale for resale.

The status of a sale will not change even if the Taxpayer sells its products to a registered dealer, who in turn resells the products to end users and the Taxpayer drop ships the products directly to the end user.

Drop shipment to the Job Site of a Purchaser Who is a Contractor-Dealer

If a contractor-dealer purchases products from the Taxpayer and has the Taxpayer drop ship the products to a job site in Tennessee for use by the contractor-dealer as a contractor, then the sale is a taxable retail sale under the Tennessee sales and use tax laws.

Also, if sales to contractor-dealers that are tagged or marked for a particular job that will be performed by the contractor-dealer, or are delivered to the contractor-dealer’s job site for use by the contractor-dealer, cannot be purchased tax-exempt with a resale certificate.  Therefore, the taxpayer must collect all applicable sales or use tax on those sales.

For Further Information:

Tennessee Department of Revenue – Letter Ruling No. 11-64