Illinois – Drop Shipment Products for Resale

SALT Report 2986 – The Illinois Department of Revenue issued a general information letter that discusses drop shipments.  The Taxpayer is an Illinois company that manufactures and sells equipment through a network of independent distributors around the country.  The distributors, in turn, sell the equipment to their customers, who are the end-user.

In most cases, the Taxpayer follows the guidelines in Illinois Administrative Code Section 130.225, where it classifies drop shipments as two separate transactions: 1) a sale from the Taxpayer to an out-of-state distributor without an Illinois sales tax resale number; and 2) a second sale from the out-state distributor to the Illinois end user.  In this situation, the Taxpayer does not collect sales tax from the out-of-state distributor on the drop shipment to the Illinois end-user.

However, on occasion, the Illinois end-user will request to pick up the equipment from the Taxpayer’s manufacturing facility with the end-user’s own vehicle, rather than having the equipment shipped to them by a common carrier.  Because of this, the Taxpayer requested a ruling as to whether it would be required to collect Illinois sales and use tax on drop shipment transactions in which the Illinois end-user picks up the equipment using its own vehicle, thereby eliminating the use of a common carrier.

In its response, the Department stated that the Taxpayer is a seller required to collect Illinois tax and must either charge and collect tax or document that the sale is exempt or for resale when it makes deliveries in Illinois.  To document a sale for resale, the Taxpayer should include the Purchaser’s registration or resale number on a Certificate of Resale.

However, in lieu of a resale number, the Purchaser could certify on a Certificate of Resale the details of the drop-shipment and the fact that Purchaser has no contact with Illinois that would require it to be registered and that it chooses not to obtain an Illinois resale number. This would constitute evidence that this particular sale is a sale for resale, despite the fact that no registration number or resale number is provided.

Therefore, assuming the Taxpayer receives proper documentation from the Purchaser that the sale is for resale, the Department stated that it would consider the transaction to be a purchase for resale and would not require the Taxpayer to collect tax from the Illinois customer, even if the end-user customer picks up the equipment from the Purchaser.

For Further Information

Illinois Department of Revenue – General Information Letter ST 13-0042-GIL