“Drop Shipment” Sales Tax Rule Is Held Constitutional

In D & H Distributors, Inc. v. Commissioner of Revenue (July 31, 2017), the Massachusetts Supreme Judicial Court (SJC) upheld the imposition of sales tax against a wholesaler that delivered goods directly to consumers in “drop shipment” transactions.

The SJC describes a “drop shipment” as a “transaction in which a Massachusetts consumer … finds a hypothetical baseball glove online, and purchases it from an out-of-state retailer who then orders the glove from a Massachusetts wholesaler and directs the wholesaler to deliver the glove directly to the doorstep of the Massachusetts consumer.”  Please see the diagram illustration on our website.

The SJC agreed with the Appellate Tax Board that (1) the wholesaler bore the burden of proof to establish that another party, the retailer, was required to pay sales tax, and (2) imposition of tax against the wholesaler is constitutional because it does not violate the dormant commerce clause.

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