United States

Massachusetts wholesaler liable under sales tax drop shipment rule

Court upheld rule against Dormant Commerce Clause challenge.


On July 31, 2017, the Massachusetts Supreme Judicial Court issued its decision in D&H Distributing Co v. Comm’r of Revenue, affirming the Massachusetts Appellate Tax Board that held an out-of-state wholesale distributor liable for Massachusetts sales tax on transactions under the “drop shipment rule.”  


The taxpayer, a wholesale distribution company, was in the business of selling various consumer goods to mostly “big box” retailers at wholesale and delivering the goods to Massachusetts consumers and others on behalf of the retailers. The taxpayer established Massachusetts sales tax nexus through a sales representative who both lived and worked in the state.

Under the drop-shipment transaction, Massachusetts consumers made purchases from out-of-state retailers. Those retailers would then order the products from the taxpayer. At the discretion of the retailer, the taxpayer also packaged and shipped the products directly to the Massachusetts consumer. Pursuant to these transactions, the board found the taxpayer liable for sales taxes when the products sold to the out-of-state retailers were subsequently delivered by the taxpayer to in-state customers.

The opinion

Pursuant to Massachusetts General Laws Section 1, the definition of “sale at retail” includes scenarios where tangible personal property is physically delivered into the state by an owner or “former owner” (the taxpayer) to the ultimate purchaser residing in the state pursuant to a retail sale made by a vendor (the retailer) not engaged in business in the commonwealth. The statute also states that the person effectuating the delivery is considered the vendor of the property and the transaction is considered a retail sale if such person making the delivery is engaged in business in Massachusetts. This rule is known as the “drop shipment rule.”

The taxpayer contended that the Massachusetts drop shipment rule violated the dormant commerce clause, and discriminated against interstate commerce because wholesalers with nexus in Massachusetts, and doing business with out-of-state retailers, were treated differently than transactions with in-state retailers where the wholesaler would not be obligated to collect sales tax. In upholding the drop shipment rule, the court indicated that because transactions with both in-state and out-of-state retailers were equally subject to tax, no greater burden existed on the interstate transaction and therefore there was no violation of the dormant commerce clause.

Additionally, the taxpayer argued that the state had the burden of proof in establishing that the retailer did not have nexus. If the out-of-state retailer did have nexus, the taxpayer would not have been obliged to collect the tax. However, the court determined that the moving party, the taxpayer in this case, must provide evidence that the retailer does in fact have nexus in Massachusetts. The court stated that the state established a factual basis for the validity of its assessment by relying exclusively on the taxpayer’s business practice of requiring applications from the retailers it contracts with as proof that its customers were not engaged in business in Massachusetts. At no point did the taxpayer provide evidence showing that its customers had nexus with Massachusetts.


The court found that the Massachusetts sales tax statute on drop shipments is constitutionally permissible and, therefore, taxpayers engaging in these type of transactions may be subject to a sales tax collection obligation in Massachusetts. Wholesalers operating in Massachusetts, or any other state, and delivering product into those states under drop shipment arrangements with out-of-state retailers should consider consulting with their tax advisors on whether the wholesaler has a sales tax collection obligation. 


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