New CCH Book Clarifies Drop-Shipment Taxation Questions

(RIVERWOODS, ILL., August 11, 2004) Tax practitioners now have reliable guidance from CCH Tax and Accounting (CCH), a leading provider of tax information, software and services, on how businesses should deal with the complexities of sales and use taxation of drop shipments. Drop Shipments: Taxation, Compliance and Planning brings together in one resource each state’s rules with references to the statutes and regulations defining the increasingly common and complex area of drop-shipment taxation. The book is the result of a comprehensive CCH research project surveying the 45 states with a sales tax and the District of Columbia. The result is a detailed look at each jurisdiction’s drop-shipment statutes and rules. Additional analysis and consultation is provided by noted sales tax authority Diane Yetter, president of Yetter Consulting Services, Inc. and founder of the Sales Tax Institute in Chicago. (280 pages, $149. For more information or to order, call 800-248-3248 or visit the CCH Online Store at

With drop shipments, a manufacturer ships the product sold by a distributor direct to the consumer. This common situation raises many questions. Is this one transaction or two? What documentation is necessary to prove a purchase for resale occurred—is a resale exemption certificate necessary, or will other paperwork such as an invoice suffice? Which state’s resale certificate should be accepted from the distributor? What happens if the manufacturer is registered in the consumer’s state, but the distributor is not? (Click here for complete list of survey questions.)

"This survey gives actual answers from state revenue departments about how they say a transaction should be taxed, not conjecture," Yetter observed.

Nexus an Important Component

When drafting the questionnaire for the study, Yetter and CCH’s editors included questions regarding nexus creation based on fulfillment activities. Many of today’s e-commerce relationships call for the use of drop-shipment transactions, and nexus is a growing concern. The survey shows that:

  • About half of the states will allow the manufacturer to pack and ship orders when the inventory is owned by the manufacturer without creating nexus — i.e., the need to collect taxes in the destination state — for the distributor.
  • Almost every state, however, deems significant fulfillment activity, such as order and payment processing and handling product returns, to create an agency relationship and therefore nexus for the distributor.

Some Broad Similarity, No Uniformity

In some instances, the CCH survey showed broad strokes of similarity between states. For example, more than 70 percent of the states exempt the distributor’s purchase as a purchase for resale and a majority of these states accept a resale exemption certificate from any state, requiring only proof that the product is resold. In states that require the manufacturer to collect tax from the distributor, 75 percent allow the distributor to pass the consumer’s exemption certificate to the manufacturer to be relieved of tax liability if the consumer qualifies for an exemption.

"The majority of the states recognize that a drop shipment comprises two separate transactions and that the manufacturer is selling for resale to the distributor," Yetter says.

Yet drop-shipping goods into states that do not follow these rules, without adequate research and preparation, could result in large tax assessments or nexus for the company that would create filing obligations and other headaches.

"As with many sales and use tax issues, compliance in drop-shipment transactions must be researched on a state-by-state basis to avoid hefty assessments during later state audits. We’ve made that research easier with this survey and our new book by asking all the relevant questions and compiling authoritative answers from the tax authorities in each jurisdiction," Yetter observed.

The CCH survey also turned up several quirks that could prove vital to sales tax managers looking to avoid an unnecessary tax liability for their companies, including special rules regarding collection and basis.

"There are things you wouldn’t expect, which makes us doubly glad we asked," Yetter said.

For More Information

For more information or to order Drop Shipments: Taxation, Compliance and Planning call CCH at 800-248-3248 or visit the CCH Online Store at Single copy price is $149. Quantity discounts are available.

About CCH Tax and Accounting

CCH Tax and Accounting (, based in Riverwoods, Ill., is a leading provider of tax and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market leading products are the ProSystem fx Office, CCH Tax Research NetWork, CCH Accounting Research Manager and the U.S. Master Tax Guide. CCH Tax and Accounting is a Wolters Kluwer company ( Wolters Kluwer NV is a leading multinational publisher and information services company, with annual revenues (2003) of EUR 3.4 billion and approximately 19,500 employees worldwide.

About Diane Yetter and Yetter Consulting Services, Inc.

Diane L. Yetter is president of Yetter Consulting Services, Inc., a sales tax consulting firm, and founder of the Sales Tax Institute. Prior to her current position, Yetter was a state and local tax manager in the Chicago office of Andersen LLP. Additionally, Yetter managed the sales and use tax function for the Quaker Oats Company and served as a sales and use tax auditor for the Kansas Department of Revenue. Yetter Consulting Services, Inc. (, headquartered in Chicago, IL, is a consulting firm that focuses exclusively on its clients’ needs regarding sales, use and miscellaneous state and local transaction taxes. The firm helps customers better manage their sales and use tax obligations. YCS has implemented transactional tax management systems for many Fortune 500 companies, and helps a wide variety of customers interact with taxing authorities.

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