Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 18 - Taxable and Exempt Sales Determined by Method of Transaction or Usage › Rule 701-18.55 - Drop Shipment Sales

Current through Register Vol. 47, No. 3, July 24, 2024
A "drop shipment" generally involves two sales transactions
				  and three parties. The first party is a consumer located inside Iowa. The
				  second party is a retailer located outside the state. The third party is a
				  supplier who may be located inside or outside of Iowa. The two sales
				  transactions in question are the sale of property from the supplier to the
				  out-of-state retailer, and the further sale of that property from the
				  out-of-state retailer to the consumer in Iowa.
A "drop shipment sale" occurs when the consumer places an
				  order for the purchase of tangible personal property with the out-of-state
				  retailer The retailer does not own the property ordered at the same time the
				  consumer's order is placed. The retailer then purchases the property from the
				  supplier The supplier in turn ships the property directly to the consumer in
				  Iowa. Under Iowa law the supplier in a drop shipment sale cannot be required to
				  collect tax (either sales or use) from the consumer, even if the requisite
				  "nexus" to require collection exists. See the next to last paragraph of this
				  rule for a characterization of "nexus." The supplier transfers possession of
				  the goods to the consumer; however, transfer of possession alone has never been
				  held to be a "sale" for the purposes of Iowa sales and use tax
				  law.
Sturtz V. Iowa Department of Revenue,
373 N.W.2d 131 (Iowa
				  1985) and
Cedar Valley Leasing V. Iowa Department of Revenue,
274 N.W.2d 357 (Iowa 1979).
With reference to drop shipment sales: If delivery of the
				  goods under the contract for sale has occurred outside of Iowa, sale of the
				  goods has occurred outside of Iowa. If delivery of the goods under the contract
				  for sale has occurred within Iowa, the sale has occurred here.
				  See
Sturtz
above for more information regarding sales and
				  delivery. If the sale has occurred in Iowa and the retailer possesses the
				  requisite nexus to require it to collect Iowa tax, the retailer is obligated to
				  collect Iowa sales tax upon the "gross receipts" from its sale of the goods to
				  the consumer. If the sale has occurred outside this state, and the retailer
				  possesses the nexus to require it to collect Iowa tax, the retailer is
				  obligated to collect Iowa retailer's use tax upon the purchase price of the
				  goods. If the retailer does not have nexus sufficient to require it to collect
				  either Iowa sales or Iowa use tax, or if the retailer fails to collect either
				  tax, the consumer is obligated to pay a consumer use tax directly to the
				  department upon the purchase price of the goods. These rules are illustrated in
				  the following examples.
Example A: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The Minneapolis retailer contracts
				  with a supplier in Iowa to manufacture and ship the goods to the consumer The
				  retailer has nexus with Iowa, and delivery under the contract for sale has
				  occurred in this state. In this case, the consumer is obligated to pay and the
				  retailer is obligated to collect Iowa sales tax. The supplier is not obligated
				  to collect any Iowa tax.
Example B: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The Minnesota retailer contracts
				  with a supplier in Iowa to manufacture and ship the goods to the consumer The
				  retailer has no nexus with Iowa. Delivery under the contract of sale is in
				  Iowa. Under these circumstances, the consumer is obligated to pay consumer's
				  use tax directly to the department. Neither the retailer nor the supplier is
				  obligated to collect any Iowa tax.
Example C: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The retailer contracts with a
				  supplier in Minneapolis to manufacture and ship the goods to the consumer in
				  Des Moines. The retailer has nexus with Iowa, and delivery under the contract
				  for sale occurs in Iowa. Under these circumstances, the consumer is obligated
				  to pay and the retailer is obligated to collect Iowa sales tax. The supplier is
				  not obligated to collect any Iowa tax.
Example D: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The retailer contracts with a
				  supplier in Minneapolis to manufacture and ship the goods to the consumer in
				  Des Moines. The retailer has nexus with this state; delivery under the contract
				  for sale is in Minnesota. Under the circumstances, the consumer is obligated to
				  pay and the retailer is obligated to collect Iowa retailer's use tax. The
				  supplier is not obligated to collect or pay any Iowa tax.
Example E: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The retailer contracts with a
				  supplier in Minneapolis to manufacture and ship the goods to the consumer in
				  Des Moines. The retailer has no nexus with this state. Delivery can occur in
				  either Minnesota or Iowa. In this example, the consumer is obligated to pay
				  Iowa consumer's use tax directly to the department. Neither the retailer nor
				  the supplier is obligated to collect any Iowa tax.
Example F: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The retailer contracts with a
				  supplier located in Madison, Wisconsin, to ship the goods to the consumer in
				  Des Moines. The retailer has nexus with Iowa, and delivery under the contract
				  for sale is in Iowa. Under these circumstances, the retailer is obligated to
				  collect and the consumer obligated to pay Iowa sales tax. The supplier is not
				  obligated to collect any Iowa tax.
Example G: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The retailer contracts with a
				  supplier located in Madison, Wisconsin, to ship the goods to the consumer in
				  Des Moines. The retailer has nexus with Iowa with delivery in Madison,
				  Wisconsin. Under these circumstances, the retailer is obligated to collect and
				  the consumer obligated to pay Iowa retailer's use tax. The supplier is not
				  obligated to collect any Iowa tax.
Example H: A consumer in Des Moines, Iowa, purchases goods
				  from a retailer in Minneapolis, Minnesota. The retailer contracts with a
				  supplier located in Madison, Wisconsin, to ship the goods to the consumer in
				  Des Moines. The retailer has no nexus with Iowa. Delivery under the contract
				  for sale may be in Iowa or Wisconsin. Under these circumstances, the consumer
				  is obligated to pay Iowa consumer's use tax directly to the department. Neither
				  the retailer nor the supplier is obligated to collect any Iowa tax.
As used in these examples, the requirement of "nexus" is
				  discussed in
Good's Furniture House Inc. V. Iowa State Bd. of Tax
				  Review,
382 N.W.2d 145 (Iowa 1986); cert. den. 479 U.S.
				  817;
State Tax commission v. General Trading Co.,
10 N.W.2d
				  659,233 Iowa 877 (1943) affd. 64 S.Ct. 1028, 322 U.S. 335, 88 L.Ed. 1309;
				  and
Nelson v. Sears, Roebuck & Co.,
292 N.W 130, 228 Iowa
				  1273 (1940) reversed 61 S.Ct. 586, 312 U.S. 359, 85 L.Ed. 522, as well as other
				  judicial decisions, and Iowa Code section 422.43(12).
This rule is intended to implement Iowa Code subsections
				  422.42(2) and 422.42(5).