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Massachusetts Exemption Certificates for Drop-Ship: A Catch-22

author photo of Sylvia F. Dion

I’m often asked questions about drop-ship transactions and sales tax. This isn’t surprising as the sales tax rules on drop-ship transactions and their sales tax implications, such as what type of documentation is accepted by the various states to exempt what is essentially a sale for resale, can be complex. The Massachusetts rules, in particular, are not just complex, but can create sales tax issues for an out-of-state retailer that is not registered for sales tax collection purposes in Massachusetts and who directs goods be drop-shipped to a Massachusetts customer. And so, in today’s post, I’ll explain the Massachusetts drop-ship rules, their application and how they can create a "catch-22."

What Exactly is a Drop-Ship Transaction?

Before launching into the Massachusetts rules, it’s important to have a basic understanding of a drop-ship transaction. These transactions, which generally involve at least three parties, are not only complex, but can be quite confusing in terms of which party does what and how each is impacted sales-tax wise. Part of the confusion comes from the fact that there can be a variety of business types involved in a drop-ship transaction, including manufacturers, suppliers, distributors, wholesalers, resellers, vendors, retailers, etc. To add to this confusion, the various states do not always use consistent terms to describe the various parties, or may use these terms interchangeably. Which is why focusing on the two key parties, what their role is, and the various terms that can be used to refer to these parties, is a good starting point.

Party A – Seller. A drop-ship transaction always includes a seller. This is the party that makes the sale to the final consumer – the retail sale. The seller, however, does not typically maintain inventory of the goods it sells. When the seller receives an order from its customer (generally the final consumer), the seller directs its supplier (Party B in the next bullet) to “drop-ship” the goods directly to the seller’s customer who may be located anywhere in the country or even overseas. States use a variety of terms when referring to Party A, including seller, retailer, vendor, distributor, and reseller. But to things simple and consistent, I’ll refer to this party as “the Retailer.”

Party B –Supplier/Shipper of Product. This is the party that holds the goods that are being sold by the Party A to the final consumer. Party B may be the manufacturer of the goods or may be a wholesaler who purchases inventory for distribution. Thus, while Party B is also a seller, in a typical drop-ship transaction Party B sells at the wholesale level – such as to Party A who will then sell the goods at retail. States use a variety of terms to refer to Party B, including manufacturer, wholesaler, and supplier. But to keep things simple and consistent, I’ll refer to this party as “the Manufacturer”.

As you can see, from a business perspective, a typical drop-ship transaction consists of two sales – a sale from the Manufacturer to the Retailer, and a second sale from the Retailer to the final consumer. From a sales tax perspective, the Manufacturer has made a sale for resale, and if the Manufacturer is registered for sales tax purposes in the final consumer’s “ship to” state, the Manufacturer must charge sales tax on the sale to his customer, the Retailer, unless the Retailer provides the Manufacturer a resale certificate that is accepted by the “ship to” state.

The Massachusetts Rules - Complex and Inflexible

What happens when a Manufacturer registered for Massachusetts sales tax purposes drop-ships goods to a Retailer’s Massachusetts based customer, but the Retailer is not a Massachusetts registered sales tax vendor? (Note in situations like this, states will often refer to the Retailer as the “unregistered vendor” or “unregistered retailer.”)

First of all, the Massachusetts sales tax law generally requires a Manufacturer with nexus to Massachusetts to collect tax when it ships goods into Massachusetts on behalf of a Retailer that is not required to collect the tax because the Retailer does not have nexus to Massachusetts. Although from a business perspective, there is no actual contract between the Manufacturer and the Retailer’s Massachusetts customer (remember, the contract is between the Manufacturer and the Retailer), from a Massachusetts sales tax perspective, the Manufacturer is deemed to have made a retail sale to the Massachusetts consumer. (For this reason, Massachusetts is sometimes referred to as a "deemer" drop-ship state.) Here's how the Massachusetts law addresses this in its definition of a "retail sale":

"When tangible personal property is physically delivered by an owner, a former owner thereof, a factor, or an agent or representative of the owner, former owner or factor, to the ultimate purchaser residing in or doing business in the commonwealth, or to any person for redelivery to the purchaser, pursuant to a retail sale made by a vendor not engaged in business in the commonwealth, the person making or effectuating the delivery shall be considered the vendor of that property, the transaction shall be a retail sale in the commonwealth by the person….. "

In effect, because the Manufacturer is considered to have made a Massachusetts retail sale, if the Manufacturer is registered for Massachusetts sales tax purposes, it is required to either charge Massachusetts sales tax on the sale to the Retailer or collect a valid resale certificate. Since the Retailer is the Manufacturer’s customer, the Retailer must provide a resale certificate in accordance with the Massachusetts rules. Once again, from a business perspective, the Manufacturer’s legal contract is with the Retailer (not with the Retailer’s Massachusetts consumer).

The Massachusetts Sales Tax Resale Certificate "Catch-22"

Here is where things can get problematic for an unregistered Retailer. You see, in order for Manufacturer to “exempt” the sale from Massachusetts sales tax, the Retailer must be able to provide a Massachusetts Form ST-4, the Massachusetts Sales Tax Resale Certificate. However, issuing an ST-4 requires the Retailer to certify that the Retailer holds “a valid Massachusetts Vendor’s Registration Permit, issued by the Commissioner of Revenue, pursuant to Massachusetts General”. Thus, an unregistered Retailer is not legally permitted to provide a Massachusetts ST-4.

And here’s what even more problematic for an unregistered Retailer – Massachusetts is extremely inflexible when it comes accepting other forms of documentation that support a sale for resale exemption. For instance, states that are members of the Streamlined Sales and Use Tax Agreement (SST) are required to accept the SST Exemption Certificate. However, as I mentioned in my last Massachusetts post, Massachusetts is not a SST member state so the SST Exemption Certificate cannot be used to claim a resale exemption. (For more Massachusetts sales tax facts, see my last post, “Massachusetts Sales Tax: Five Things You Should Know) Many other states, including states that are not SST members, are much more flexible than Massachusetts and will accept the MTC Multijurisdictional Exemption Certificate or even a certificate from the “ship to” state with a “no-nexus” statement or with the unregistered distributor’s home state sales tax permit number.

Concluding Thoughts

In a nutshell, an unregistered Retailer that directs a registered Manufacturer to drop-ship product to the Retailer’s Massachusetts customer is subject to Massachusetts sales tax on its purchase from the Manufacturer even if the goods are being purchased for resale. (Another complexity not touched on is that the Manufacturer is supposed to charge tax on the sales price that the Retailer charges its final customer – but the manufacturer may not know this amount.) The only documentation that Massachusetts will accept to support that the Retailer's purchase qualifies as a purchase for resale is Massachusetts Form ST-4. (For the Massachusetts rules on resale and exempt use certificates see Massachusetts regulation, 830 CMR 64H.8.1) Adding to the Retailer’s problems, since the Retailer is not a Massachusetts registered vendor, it cannot attempt to recoup the sales tax it paid by charging sales tax to its Massachusetts customer. Yes, a "catch-22" indeed!

Incidentally, drop-ship and exemption certificates are two topics that are consistently searched for here at SalesTaxSupport (as evidenced by the “Top Searches” box in the left side bar). As I’ve only focused on the Massachusetts rules, if you looking for information on other states, or have a specific drop-ship related question, check out the following sections on SalesTaxSupport: Drop Shipments Q & A - Third Party Shippers & Other Multi-Address Scenarios, Resale/Exemption Certificate Requirements - "By State" Lookup , and the Sales Tax Exemption Certificate Library.

If you have questions or comments on today’s post, or ideas for future “Massachusetts Sales Tax” posts, I invite you to post a comment below.

About the Author: Sylvia Dion is the Founder and Managing Partner of PrietoDion Consulting Partners LLC, a SALT advisory firm which provides SALT services to businesses in the U.S. and throughout Europe, Canada, Latin American and Australia. Since 2011 Sylvia has served as a contributor to the SalesTaxSupport blogs and currently blogs on Internet Sales Tax, U.S. Sales Tax for Foreign Sellers, and Massachusetts Sales Tax. Sylvia has written articles for State Tax Notes, Bloomberg BNA and other premier tax journals. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “Massachusetts (MA)” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.


11 Responses to Massachusetts Exemption Certificates for Drop-Ship: A Catch-22

  • Posted by Chris on September 25, 2016 1:14pm:

    Syliva - Great topics. I started a new business in Illinois drop shipping office supplies from a publicly traded/large wholesaler who has warehouses throughout the United States. I assume they have Nexus from what I have read. I have a new customer in Boston and I am not sure what or if any sales tax/use tax should be collected. I am a very small company that receives customer orders and transfers the orders via 3rd party software over the wholesaler who then drop ships. Any info would be great. Thanks

    • Posted by Author photo of Sylvia F. DionSylvia Dion on October 2, 2016 3:08pm:


      Hello and thank you for your kind words and your comment/question.

      Your scenario sounds very similar to what I describe in my blog post above. You say that your drop shipper has warehouses all over the U.S. and likely has nexus in Massachusetts. If the drop-shipper has nexus in Massachusetts, the drop-shipper is likely (or should be) registered to collect Massachusetts sales tax. When you direct the drop-shipper to ship the final product to your Massachusetts customer, the drop-shipper will charge YOU Massachusetts sales tax (remember, the drop-shipper is BILLING you but SHIPPING to your customer). Because the "ship-to" address is Massachusetts, the drop shipper will charge you MA sales tax. If you have no nexus to Massachusetts, you do not have to charge your customer Massachusetts sales tax (the customer would be required to remit MA use tax on that purchase) but unless you are registered as a Massachusetts vendor, you can't give your drop-shipper a resale certificate AND you can't recoup the sales tax the drop shipper charges you by charging it to the customer. So you find yourself in the same "catch-22" is describe above.

      Hope this helps.

  • Posted by Brent on May 2, 2016 9:04am:

    If I'm the supplier and neither us, as supplier, or retailer has nexus in Massachusetts are we, as supplier, required to charge sales tax on an end-customer in Massachusetts?

    • Posted by Author photo of Sylvia F. Dionsylviadion on May 9, 2016 5:06pm:

      Thank you for reading my post and for your comment/question.

      Whether you, as the supplier (the drop-shipper) are required to charge sales tax to an end-consumer in Massachusetts depends on whether you have nexus to Massachusetts (according to how Massachusetts defines nexus). If you, the supplier do not have nexus and the retailer (who is directing you to drop-ship the product to their end consumer in Massachusetts) also does not have nexus, then neither you or the retailer need to charge Massachusetts sales tax (the consumer is then responsible for paying the Massachusetts Use Tax.)

      Hope this helps.

  • Posted by Kristen on January 26, 2016 10:34am:

    Can a vendor recoup past sales tax if they did not initially charge on their invoice? If so, how far back can they re-coup. This is in the state of Massachusetts. We are a consulting firm. The vendor provided information that we purchased on to our customer as part of the consulting services provided.

    • Posted by Author photo of Sylvia F. DionSylvia Dion on February 6, 2016 7:11am:

      Kirsten, Thank you for reading my post and for your comment. I will say, I'm not entirely sure I understood your question so here is some general guidance. If a vendor did not charge and collect sales tax from a customer, they cannot "recoup" from Massachusetts, the amount of sales tax that should have been collected if the vendor never paid the tax to Massachusetts. But if you mean whether the vendor can go back and adjust his invoice by issuing a new invoice with sales tax on it (because the vendor failed to charge it) or by a issuing a new invoice without sales tax on it and ask you to refund them the sales tax, then yes, the vendor can do that. In general, vendors are sales tax collectors for the governments. They collect the tax from the customer and remit it to the state. Because sales tax is a trustee tax, in some states, a vendor's only recourse for getting back the sales tax is to get it back from the customer from whom they erroneously collected it.

  • Posted by Heather on October 27, 2015 5:05am:

    In what states could a true retailer attempt to recoup from the end-user-customer the sales tax charged by a drop shipper who is required to collect tax? For example, I know in Maryland if you want to recoup you have to include it in your sales price (not allowed to be shown separately); what states allow you to show it separately, or pass it along at cost?

  • Posted by Pat on October 19, 2015 1:31pm:

    I'm am starting up a drop-ship retail business in Massachusetts.
    The manufacturer will most probably be in North Carolina. Do I have to charge sales tax to customers in Massacusetts? Do I have to charge sales tax to customers in other states?

    • Posted by Sylvia on October 23, 2015 7:47pm:

      Thank you for reading my post and for your comment.

      The requirement to collect sales tax is going to be based on where you (your business) has "nexus." As your drop-ship business will be based in Massachusetts, you will have nexus in Massachusetts and be required to charge Massachusetts sales tax. If you have nexus in other states, you may have an obligation to collect sales tax in other states.

  • Posted by Annette on April 8, 2015 10:12pm:

    Sylvia - thanks for the wonderful overview. "Complex and inflexible" are unfortunate ways to have to describe a tax system! Nice job! Thanks.

    • Posted by Sylvia on May 19, 2015 7:29pm:

      Many thanks for the kind words!! As states aren't generally known for making things easy to comprehend or for being flexible its no wonder taxpayers are so often perplexed about how the state tax laws apply to their situation.
      Thanks again!

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