SALT Report 2597 – The Connecticut Department of Revenue Services updated their guidance regarding the application of sales and use tax to drop shipments. The policy statement referrers to the statutory definition of a retail sale provided in Conn. Gen. Stat. §12-407(a)(3)(A). The statutes provides that, “ the delivery in Connecticut of tangible personal property…to a consumer pursuant to a retail sale made by a retailer not engaged in business in the state, is a retail sale by the person making the delivery. Such person is required to include the retail selling price of the property in such person’s gross receipts.”
Connecticut refers to this statute as the “drop shipment rule.” Under this rule, liability for sales tax is imposed on third parties, who are typically the manufacturer or wholesaler of the goods, and are responsible for delivering the goods into Connecticut on behalf of retailers who are not engaged in business in the State.
The drop shipment rule applies when the wholesaler sells tangible personal property to an unregistered out-of-state seller and the wholesaler either delivers the tangible personal property with its own vehicle to the unregistered seller’s customer in Connecticut or ships it F.O.B. destination. In this situation, the wholesaler must charge the customer tax on the goods delivered in Connecticut unless the customer establishes that the purchase is not taxable by providing the wholesaler with a:
- Connecticut resale certificate,
- Multistate Tax Commission Uniform Sales & Use Tax Certificate – Multijurisdiction issued as a resale certificate
- Connecticut exemption certificate, or
- Direct payment permit
However, a resale certificate or exemption certificate issued by an unregistered seller to the wholesaler will not exempt the sale of tangible personal property from Connecticut tax. Therefore, the drop shipment rule does not apply if the wholesaler is not registered in Connecticut as a retailer.
In cases where the wholesaler is not registered as a retailer in Connecticut, or if it is, but the goods are shipped by a common carrier and the shipment was accepted by the common carrier outside Connecticut, or if the contract states F.O.B. shipping point, F.O.B. seller’s plant or F.O.B. seller’s city the following rule would apply:
Connecticut sales or use tax will apply to any transaction where title to the goods transfers from the seller to the buyer in Connecticut. Connecticut use tax will apply to any transaction where title to the goods transfers outside Connecticut, but the goods are intended to be used in, and are brought into, Connecticut.
Because the wholesaler is not required to charge Connecticut sales tax to the unregistered seller and customer, the customer will owe use tax on the full purchase price of the goods. This does not apply if the customer is purchasing the goods for resale, or is tax exempt under Conn. Gen. Stat. §12-412.
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