Illinois – Drop shipments and resale certificates (GIL 13-0062)

SALT Report 3185 – What is sufficient evidence to support drop-shipment resale transaction?  In a drop-shipment transaction an out of state Purchaser has an instate Company “drop ship merchandise to a Customer in Illinois.”  Rather than pay tax to the Company, Purchaser provided Company a “copy of a letter from the Illinois customer stating they will self-assess Illinois use tax.”

Whenever a purchaser buys for resale, two transactions usually take place.  “The first transaction occurs when Company sells to Purchaser. A second transaction occurs when Purchaser sells to Customer.” A Company in this case must either “charge and collect tax or document appropriate exemptions when making deliveries in Illinois.”

This GIL discusses the various forms of documentation that are acceptable pursuant to the language of the law.  Ideally, the Purchaser (lacking nexus) may register for a permit number in Illinois without a corresponding obligation to file tax returns.  Clearly, the nexus issue must be well defined in order for an out of state Purchaser approach a state with certainty they do not have a collection and reporting responsibility.  The GIL goes on to state that in the absence of a Purchaser providing a valid permit number a presumption of taxability will exist and both the first and the second transaction will be presumed to be taxable.  However, the GIL states that “This presumption may be rebutted by other evidence that all of the seller’s sales are sales for resale or that a particular sale is a sale for resale. See 35 ILCS 120/2c.”  So it would appear that an alternative statement similar to the one described in this GIL would be acceptable with the following important warning regarding exemption certificates and “other evidence”.

After reinforcing the preferred form of acceptance the GIL goes on to state “The risk run by Company in accepting such a certification, and the risk run by Purchaser in providing such a certification, is that an Illinois auditor may be more likely to go behind a Certificate of Resale which does not contain a valid resale number and require that more information be provided by Company as evidence that the particular sale was, in fact a sale for resale.”

For Further Information: