Charles A. Jenkins – 2010

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Resale Certificates

Your constituent’s question regarding acceptance of resale certificates under the Maryland sales and use tax law relates to “drop shipments.” Drop shipments are transactions in which a retail seller fills an order to a customer through a third party supplier. Instead of shipping the product to the customer from its place of business, the retail seller directs its supplier to ship the product directly to the customer. While the product is shipped directly from the third party supplier to the customer, there are actually two sales that occur in a drop shipment transaction – the sale from the supplier to the retail seller, and the sale from the retail seller to the ultimate customer. The sale from the supplier to the retail seller is not a “retail sale” subject to the Maryland sales and use tax, because the buyer (i.e., the retail seller) intends to resell the product to the retail customer. However, unless the buyer provides the supplier a valid resale certificate at the time of the sale, the supplier is required to collect the sales and use tax from the retail seller. The retail seller can then file with the Comptroller for a refund of the tax paid, after demonstrating that the sale on which the tax was paid was an exempt sale for resale.

The issue cited by your constituent occurs when the retail customer and the third part supplier are located in Maryland but the retail seller lacks nexus with Maryland and has not voluntarily registered with the Comptroller under the sales and use tax. Under Maryland law, except for the sale of antiques or used collectibles, only a Maryland resale exemption certificate from a vendor holding a valid Maryland sales and use tax registration certificate is acceptable.

As a result, if the retail seller is not registered for sales and use tax purposes in Maryland, it cannot provide a valid resale certificate, and the supplier is required to collect the sales and use tax from the retail seller.

As noted by your constituent, the Streamlined Sales and Use Tax Agreement (Agreement) requires member states to allow third party suppliers in drop shipment transactions to accept resale exemption certificates from an out-of-state retail seller even if the seller lacks nexus and is not registered for sales and use tax purposes in the state where the sale is made. This requirement under the Agreement is premised on the fact that the retail customer is ultimately subject to the use tax if the tax is not collected by the vendor and on the presumption that states could identify purchasers subject to the use tax based on resale exemption data received from drop shippers, thus identifying sales that are drop shipped on behalf of unregistered sellers.

Maryland has not adopted the Streamlined Sales Tax Agreement. Allowing in-state drop shippers to accept resale certificates from out-of-state sellers, as required by the Agreement, would raise significant tax compliance issues. Without the current requirement that the drop shipping supplier collect the sales tax from the out-of-state retail seller, the Comptroller would have to rely on self-reporting of use tax liability by retail customers. This is particularly problematic for sales to individuals, because individuals are not subject to audits for sales taxes.

Identifying and pursuing collection of the tax from retail customers in the State based on resale exemption data received from drop shippers would be cumbersome and would potentially raise concerns regarding intrusion into the customers’ privacy. The Comptroller indicates that a change in Maryland law to allow suppliers to accept out-of-state resale exemption certificates would create an indeterminate but significant reduction in State revenues.

Streamlined Sales Tax Agreement

As mentioned above, Maryland has not adopted the Streamlined Sales Tax Agreement. While there are numerous policy issues related to adoption of the Agreement, a potentially significant reduction in both State sales tax revenues and local tax revenues that could result from the Agreement is one major reason why the General Assembly has not enacted legislation to adopt the Agreement.

Under federal law, Maryland is limited in its ability to require sellers without a physical presence in the State to collect sales and use taxes – this is particularly true for online sales.

Federal legislation to allow Maryland and other states additional authority to collect these sales taxes has been introduced in the last several sessions of Congress, but no action has been taken to date. Without the additional taxing authority that this federal legislation would provide and the resulting revenues, State sales tax revenues could decrease significantly with adoption of the Agreement.

Without additional authority to collect sales taxes, the Comptroller’s office estimates that adoption of the Agreement could reduce State sales tax revenues by $40 to $50 million in any given fiscal year. Certain revenue gains realized from currently exempt items that would be taxable under the Agreement would be more than offset by other required changes that would result in currently taxable items being made exempt. The imposition of a new sales tax “rounding” rule required by the Agreement would also decrease State revenues significantly.

In addition, several taxes currently imposed by some local jurisdictions may be prohibited under the Agreement; these include taxes on fuels, utilities, and certain space rentals. Under one estimate by the Comptroller, the total annual revenue reduction to these local jurisdictions could exceed $300 million.

FORMER GOVERNOR BOB EHRLICH ENDORSES DELEGATE CHARLES JENKINS FOR ELECTION

TO THE MARYLAND HOUSE OF DELEGATES, DISTRICT 3B

From Governor Ehrlich:  “I am pleased to endorse Delegate Charles Jenkins for election to the House of Delegates.  Charles has a solid record of conservatism and responsibility with his votes.  His experience at the local and state level of government is exactly the leadership we need in Annapolis.”

 Delegate Jenkins responds:  “I enthusiastically look forward to the return of Governor Ehrlich to the State House.  Governor Ehrlich met the challenge of deficit spending when he took office yet left the State with a surplus – Maryland needs Bob Ehrlich – again!”

To see video of the endorsement:  

http://www.youtube.com/watch?v=O_o_Uy8RFlE