Could a California drop shipper accept resale certificates from the out-of-state buyer's California customers?

Plain-English summary

When an unregistered out-of-state seller made a retail sale and its California supplier delivered the goods to the consumer, section 6007 deemed the delivering supplier the retailer responsible for California tax.

The supplier could accept timely valid California resale certificates from the delivery recipients, either directly or through the out-of-state customer. Good-faith acceptance relieved it from tax liability, but it was not required to accept them.

If the recipient paid tax and then resold the property before use, it could use the tax-paid-purchases-resold deduction.

Common questions

Could the recipient's resale certificate protect the drop shipper?

Yes.

Did the drop shipper have to accept it?

No.

Who was deemed retailer when the underlying sale was retail?

The California supplier making delivery.

Citations and references

• Cal. Rev. & Tax. Code §§ 6007, 6051, 6091, 6201, and 6241 — deemed retailer and sales/use-tax presumptions discussed in the letter
• Cal. Code Regs. tit. 18, § 1701 — tax-paid-purchases-resold deduction referenced in the letter

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/475-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/475-0028.pdf

Original ruling text

475.0028

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2641

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

December 14, 1993

────────
BURTON W. OLIVER
Executive Director

Ms. D--- V--Controller
E--XXX --- -----, New York XXXXX
Dear Ms. V---:

This is in response to your letter of August 25, 1993, concerning the sales and use tax consequences of certain drop shipments. You have stated as follows: “We are a New York corporation who occasionally does business in the state of California. We do not maintain an office in the state of California. We have a supplier, M--- E---, who has an office in the state of California, from which we purchase a large portion of our inventory. On occasion, we have requested M--to drop ship our orders to customers in the state of California as opposed to shipping them to us in New York. M--- will accommodate us in drop shipping however they insist on charging us sales tax as we do not have a California sales tax/resale certificate. They are contending that they are doing business with us regardless of the fact that the product is being delivered into California. We have offered to provide M--- with the resale certificates of the companies they are drop shipping the product to as proof that tax should not be charged. They refuse to accept these resale certificates. They have informed me that it is against their policy and I do not understand the information provided to me by your department.” If you are engaged in business in California, you must hold a California permit. You could then give your own California resale certificates. However, when you say that your company “occasionally does business in the state of California,” we assume that you do not mean that you are engaged in business in California within the meaning of the California Sales

Ms. D--- V---

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December 14, 1993
475.0028

and Use Tax Law. We assume that you mean that you occasionally sell tangible personal property to California customers, but that you do not have the required “nexus” to be required to register in California. Sales and use taxes are imposed at the retail level. Sales tax is imposed on retailers for the privilege of selling at retail, and use tax is imposed on the storage, use, and other consumption in California of tangible personal property purchased at retail. (Rev. & Tax. Code §§ 6051, 6201.) We assume that the reason M--- wants to collect a tax is because of the presumptions in California that a transaction is at retail. Revenue and Taxation Code section 6091 creates the presumption that “all gross receipts are subject to the [sales] tax until the contrary is established.” Revenue and Taxation Code section 6241 provides a similar use tax presumption. Both presumptions that a transaction is at retail may be overcome by the seller’s accepting timely and valid California resale certificates. If the sales by you to your California customers were retail sales, M--- would be regarded as the retailer for sales and use tax purposes under the second paragraph of Revenue and Taxation Code section 6007: “When tangible personal property is delivered by an owner or former owner thereof, or by a factor or agent of that owner, former owner or factor to a consumer or to a person for redelivery to a consumer, pursuant to a retail sale made by a retailer not engaged in business in this state, the person making the delivery shall be deemed the retailer of that property. He or she shall include the retail selling price of the property in his or her gross receipts or sales price.” (Emphasis added.) This means that if the delivery by M--- to the California customer were pursuant to a retail sale by you, who is not a retailer engaged in business in California, the transaction would be treated as a retail sale by M---. This puts the duty upon M--- to pay any sales tax or collect and remit any use tax that may be due. Since you are not able to provide California resale certificates, it is acceptable for M--to accept them from your customers, the persons in California to whom M--- makes the deliveries. They may be provided directly from your customers to M---, or they may be provided through you. In either case, the timely and good faith acceptance of valid California resale certificates will relieve M--- from liability for any sales or use taxes. We note, however, that M--- is not required to accept resale certificates, and may instead regard its sales as retail sales. If the California customer remits use tax or sales tax reimbursement and thereafter resells the property prior to any use, that person would be entitled to take a “tax-paid purchases resold” deduction. (Reg. 1701.)

Ms. D--- V---

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December 14, 1993
475.0028

If you have further questions, please contact me.
Sincerely yours,

Donald L. Fillman
Tax Counsel
DLF:wk