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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10490
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My question is about use tax and dropshipping fees. My

Customer Question

My question is about use tax and dropshipping fees. My vendor charges me a fee to dropship. If I have something sent to me for personal use do I have to pay use taxes on the dropship fee. Same scenario but the item is a gift. Do I pay use taxes on it?
Submitted: 6 months ago.
Category: Tax
Expert:  Lane replied 6 months ago.

Hi,

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Here, from TX Comptrollers offc, are the three scenarios where you would be subject to use tax: (I'll underline the pertinent part)

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1. What "purchases" are subject to use tax?

A purchase may be subject to use tax for a number of reasons. The most common reasons are:

  • You used property purchased with a resale certificate. If you use a resale certificate to purchase merchandise that you intend to resell, your supplier will not collect sales tax. However, if you use the merchandise for another purpose before you resell it, you are liable for use tax. (Using merchandise for display or demonstration purposes before the property is sold is not subject to use tax. But, providing free samples to customers is a use and you would owe tax on the amount you paid for the samples.)
  • You used property purchased with an exemption certificate. If you use an exemption certificate to purchase taxable items, your supplier will not collect sales tax. However, if you use the merchandise or service for a non-exempt purpose, you are liable for use tax. (Purchasing manufacturing equipment but using it to perform contractor work is a non-exempt use.
  • You used property purchased from an out-of-state retailer. In general, if you purchase a taxable item from an out-of-state retailer without paying Texas tax and use the property in Texas the purchase is subject to use tax and must be reported. If you paid Texas use tax to such a retailer, you are not required to report the tax. That retailer must provide you with a receipt showing, among other things, the amount of use tax collected. You should retain a copy of the receipt showing you paid Texas tax.
Expert:  Lane replied 6 months ago.

So, both if you bought but never sold (again demo or display adn eventual sale is OK) you'll pay use tax.

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UNLESS you know that the "fee" you mention is specifically (or a portion thereof) to use tax and you are provided a receipt for such use tax.

Expert:  Lane replied 6 months ago.

Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

...

Thank you!

Lane

I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Customer: replied 6 months ago.
Still not clear on the answer here
Expert:  Lane replied 6 months ago.

YOu pay it .. if you use it (incldiong its use as a gift) unless you sell it.

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OR unless your dropshipper paid it for you

Customer: replied 6 months ago.
Ok, well that's what I paid for was a phone call!
Expert:  Lane replied 6 months ago.

Your payment for the call did not go through ... I tried to accept

Expert:  Lane replied 6 months ago.

This one is reqlly quite straightfoward ... sorry for the data-dump ... just wanted to show you the regs, directly, from TX comptrollers office

Expert:  Lane replied 6 months ago.

I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content. Otherwise I’m working for no crediting at all here.

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Customer: replied 6 months ago.
I read the stuff from Texas..it says nothing about the fee the drop shipper charges me.
Customer: replied 6 months ago.
Sorry, it's not straight forward to me.
Expert:  Lane replied 6 months ago.

The tax isn't based on the fee. It's based on the value of the product.

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However, as I mentioned above, IF that fee INCLUDES a charge for use tax, then it's been paid for you... AND they will give you a receipt in that case

Expert:  Lane replied 6 months ago.

Just don't know any other way to say it ... AND it's explicitly spelled out IN those regs AND I underlined the part that was pertinent to your question

Expert:  Lane replied 6 months ago.

Here's the logic (the tax policy) ... you bought, and didn't pay a sales tax, or use tax, becasue it was an out out state drop shipper ... AND you didn't sell it and collect a sales tax there either.

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Someone has to pay

Expert:  Lane replied 6 months ago.

This is ONE thing that doesn't very from state to state tax code.

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It's designed to be sure that if the product was used in the state of TX and you didn't collect a sales tax on it from a customer, then you pay the USE tax ... You USED it.

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I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content. Otherwise I’m working for no crediting at all here.

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Customer: replied 6 months ago.
I understand I that I pay a use tax if I used the product... what I am asking about is the dropshipping fee the vendor charges me. Do I pay a use tax on the dropship fee also?
Expert:  Lane replied 6 months ago.

No, no one pays taxes on the fee

Customer: replied 6 months ago.
Where is that documentation from the state?
Expert:  Lane replied 6 months ago.

That's not how the law works ... No law states what's not taxed. (uunless there's some specific exemption) You'll see in many places what IS taxed ... let me get that for you

Expert:  Lane replied 6 months ago.

You'll see this implicitly in something I'vealready shown you (note the word "property")

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  • You used property purchased with a resale certificate. If you use a resale certificate to purchase merchandise that you intend to resell, your supplier will not collect sales tax. However, if you use the merchandise for another purpose before you resell it, you are liable for use tax. (Using merchandise for display or demonstration purposes before the property is sold is not subject to use tax. But, providing free samples to customers is a use and you would owe tax on the amount you paid for the samples.)

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You see it a little more explicity here EXPLICITY here (note the use of the term "goods.")

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"Do I owe tax on goods purchased via mail-order catalogs or Internet merchandise?

Yes. A seller who uses catalogs or the Internet to sell goods is treated the same as any other seller of taxable items."

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You see it EXPLICITLY here:

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"When you sell taxable goods or services in Texas, you must collect the 6.25 percent state sales or use tax and the appropriate local sales or use tax. This guide will help you collect and remit local taxes correctly"

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By the way, you should be deducting your drop-shipping fee as a business expense under §162 OR passing it through to the customer.

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The fee is an expense you pay NOT a part of something that you sell

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Notice this example from here: http://www.cpa.state.tx.us/taxinfo/taxpubs/tx94_105.pdf

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"Example: A taxable item purchased at a store in Seattle is shipped to an address in Austin. State use tax of 6.25 percent is due on the taxable item. Local use tax of 2 percent is due based on the ship-to address. When state sales tax is due on a taxable item, local use tax may also be due, if the item is shipped or delivered to a location in a different local taxing jurisdiction"

Customer: replied 6 months ago.
What about regular shipping fees? Do I pay a use tax on them if I purchase something from my vendor?
Expert:  Lane replied 6 months ago.

Yes, under TX administrative code;

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" The basis of the use tax is the total purchase price of the taxable item, including anyshipping and handling fees, regardless of whether such fees are separately stated. See §3.303 of this title (relating to Transportation and Delivery Charges)."

Expert:  Lane replied 6 months ago.

The answer to your question (as I now understand it is) yes, you pay use taxes on the product, no, you do not pay use tax on the drop-shipper's fees, BUT if SOLD, you can pas the tax on to the buyer and it becomes part of the basis for the tax.

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TX has not ruled on a the specific situation you have now asked about, whether a user of a non-sales item BY a person normally a seller, hence, still paying a drop shipping fee, even though the item is for himself.