Dock Sales: When Simple Sourcing is not so Simple
By J. Pablo Garciga, Funaro & Co. PC
The sale of taxable property in the US is generally subject to sales tax at the location where the vendor delivers it to the buyer. This principle is not always as simple to apply as it might first appear.
Assume a vendor has a warehouse in New Jersey (NJ) with a customer in “State A”. If the vendor delivers the items purchased to the customer and the vendor has sales tax nexus in State A, it collects the applicable sales tax. If the vendor does not have sales tax nexus in State A, it is generally incumbent on the customer to self-assess the compensating State A use tax.
However, what if the customer hires a common carrier to pick up the item at the NJ warehouse? Since NJ has a “dock sale” rule, the “delivery” is deemed to occur at the NJ warehouse and the sale is subject to NJ sales tax. But, if the NJ vendor hires the common carrier to deliver the items to the customer, the sale is sourced to State A (the common carrier is deemed the agent of the person hiring it).
This same concept impacts other taxes. Apportionment is used to determine how much of an entity’s taxable income is subjected to tax in a particular state. It is essentially a percentage – the numerator is the in-state amount and the denominator is the total amount everywhere. Some states source dock sales to the destination state; others, like NJ, source them to the state in which the dock sale occurs.
There may be planning opportunities. Refund scenarios arise when the dock sale occurs in a state that follows the destination rule and the property is shipped to a state that sources the sales to the state where the dock sale occurs.
This would create sales that would not be sourced to any state’s numerator and thereby reduce the overall effective state income tax rate. As a caveat, potential detrimental impacts can be sustained if the fact pattern is reversed. The same sale may increase the apportionment factors in two separate states, thereby increasing the respective states’ apportioned taxable base.
J. Pablo GarcigaFunaro & Co. PC, New York, USA
T: +1 212 947 33 33
Funaro & Co. PC provide a wide range of services, including accounting and auditing, tax reporting and compliance, tax advisory, management consulting, and transaction advisory.
Pablo Pablo specialises in state and local taxes (SALT), with an emphasis on multi-state corporate income/franchise taxes and sales and use taxes. He has over 20 years of cumulative SALT experience with Funaro and Big Four Public Accounting firms. He is a CPA, JD with an LLM in Taxation
Published: Indirect Taxes, No. 08 Spring 2019 l Photo: 5m3photos - stock.adobe.com