By Evan M. Hamme and Open Weaver Banks

The New York State Department of Taxation and Finance released an advisory opinion explaining how it will treat drop shipment facilitation services for sales and use tax purposes. The petitioner uses proprietary software to create an Internet-based “hub” through which a web-based merchant orders products from a supplier and directs the supplier to ship the product directly to the end customer (i.e., drop shipments). The Department’s analysis focused on two components of the services: (1) transmitting information between merchants and suppliers (the transmission component); and (2) translating merchant data into a format compatible with the supplier’s computer systems (the translation component). Finding that the translation component is more valuable to merchants than the transmission component, because merchants could easily transmit information to suppliers through traditional means (e.g., mail or fax), the Department determined that the primary function of the services is the translation component. Further, since the translation component constitutes data processing, the Department concluded that the drop shipment facilitation services are not subject to sales and use tax. N.Y. Advisory Opinion, TSB-A-15(20)S (May 26, 2015).