By Michael T. O'Neil, Esq.
Based upon some recent and alarming client telephone calls, we decided it was a good idea to provide our clients with a brief overview on how out of state sales should be treated with respect to Massachusetts' sales and use tax. As you will see below, it is quagmire of rules and exceptions that is enough to confuse the Massachusetts Department of Revenue itself.
Hopefully every client is already aware that if a Massachusetts business sells tangible personal property in the ordinary course of its business and that sale takes place in Massachusetts, then the seller generally has the duty to collect sales tax from the buyer and then submit the sales tax to the Massachusetts Department of Revenue. This is the basic starting point. It seems that the confusion begins to arise when a Massachusetts business sells goods to an individual or entity located or headquartered in another state. For example, if Spacely Sprockets, Inc. is a Massachusetts corporation located in Massachusetts but sells its sprockets to Cogswell Cogs, Inc. a New Hampshire corporation located in New Hampshire, then does Spacely have a duty to collect sales tax on the sale? Does the tax go to the Commonwealth of Massachusetts or the State of New Hampshire? Does it matter that Cogswell drove to Massachusetts to pick-up the goods? What if the goods were delivered to New Hampshire by a Spacely owned truck? What if the sprockets were delivered via Federal Express? These are, unfortunately for the Massachusetts business, only some of the pertinent questions that need to be answered to conduct an analysis of whether a sales tax is owed. Reviewing all of the rules and regulations regarding Massachusetts' sales and use tax would require a treatise hundreds of pages long. There are, however, a few rules of thumb that a Massachusetts business can rely on to conduct a "smell test" on whether they should collect sales tax, not collect sales tax or call their tax advisor:
Massachusetts General Laws Chapter 64H § 6(b) states that "sales of tangible personal property...which the vendor is obligated under the terms of any agreement to deliver (1) to a purchaser outside of the Commonwealth . . . or (2) to an interstate carrier for delivery to a purchaser outside of the commonwealth" (emphasis added) are exempt from sales tax. In other words, if the terms and conditions of a written sales agreement clearly state that title to the property does not pass until the goods enter the state of the purchaser (e.g., FOB Destination), then no Massachusetts' sales tax needs to be collected regardless of how the goods are shipped.
New Hampshire Buyer contracts with Massachusetts Seller to purchase 1,000 widgets. The terms of the agreement clearly state that the widgets must be delivered to New Hampshire and title will pass from Seller to Buyer upon delivery. No Massachusetts' sales tax will be owed if Seller delivers the widgets to New Hampshire in its own vehicle, and no Massachusetts' sales tax will be owed if the widgets are delivered by an interstate carrier.
If an agreement between a Massachusetts seller and an out of state Buyer is silent as to where the goods are to be delivered, how they are to be delivered and when title to the goods will pass from Seller to Buyer, then title to the goods will pass upon delivery by Seller to the interstate carrier and Massachusetts' sales tax must be collected on the sale.
New Hampshire Buyer purchases a computer at the Dedham, Massachusetts Staples for her son who is in college at the University of Florida. The computer will be delivered to Florida by Staples via Federal Express. There is no agreement as to when title to the computer will pass. Here, Massachusetts' sales tax must be collected by Staples.
If, pursuant to a written sales agreement, a Massachusetts Seller is obligated to deliver the goods to a Massachusetts Buyer's designee located outside of Massachusetts, then the sale will generally be taxable unless both title and possession of the goods pass outside of Massachusetts.
Massachusetts Buyer orders 10 clam chowder bowls from a Massachusetts Seller. Buyer then supplies Seller with a list of Buyer's customer all of whom are located outside of Massachusetts. Seller delivers the bowls directly to Buyer's customers via Federal Express. Here, absent any written agreement to the contrary, title to the clam chowder bowls will pass in Massachusetts and therefore sales tax must be collected.
If an out of state buyer drives to Massachusetts to purchase goods that will be used exclusively out of state, then sales tax must be collected.
Rhode Island resident drives to Massachusetts and purchases lumber for the purpose of building a residence in Rhode Island. Here, title and possession both pass in Massachusetts and therefore Massachusetts' sales tax must be collected. However, if the same Rhode Island resident enters into a written agreement with the lumberyard for the purchase of lumber, and pursuant to the agreement the lumber must be delivered by the lumberyard to the construction site in Rhode Island, then no Massachusetts' sales tax would be due.
The "Golden Rule." Upon the sale of tangible personal property, a sales or use tax is almost always owed by either the Buyer or Seller to some State's taxing authority.
Same as the second half of Example #4 above where the clever Rhode Island resident has the lumber delivered directly to Rhode Island by the Massachusetts lumberyard as opposed to driving to Massachusetts and picking it up himself thus avoiding Massachusetts' sales tax. Here, the Rhode Island resident would most likely owe a use tax to the State of Rhode Island for using the lumber in Rhode Island.
Please keep in mind that these are only basic rules of thumb and different fact patterns may garner different results. Additionally, it is important to note that all of these rules and examples deal only with Massachusetts' sales tax. When conducting sales transactions out of state, you should always consult with the applicable foreign taxing authority.