Sales Tax Questions » Drop Shipments

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Question: We drop ship our product into California for our customer located in another state. The customer does not have a resale certificate for the state of CA. Are we liable for the sales tax on this transaction?

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Response: The determination as to whether you are required to collect CA sales tax is dependent on whether your company has nexus in CA. In your submission, you indicated you are active in all the states. If this means you are registered to collect sales tax in all states including CA then you are required to collect tax on all deliveries you make on behalf of your customer to their customer in CA. The only documentation you can accept to avoid collecting sales tax on a drop shipment transaction destined for CA is a CA resale certificate. In addition, you are required to collect sales tax on the retail selling price from your customer to their customer. Absent knowledge of the retail selling price you are to collect sales tax on 110% of your selling price. If your customer's customer is reselling the product (they are not the final consumer) or if the ultimate customer has some other valid CA exemption, this exemption documentation can be provided to you to substantiate the exemption.

Diane L. Yetter
President
YETTER-tax meets technology
Sales Tax Institute
(312) 701-1800

Sales Tax Questions answered by Diane Yetter.

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