Did California's drop-shipment rule make a seller the retailer when it delivered components to a California fabricator working for an out-of-state reseller?

Plain-English summary

An Oklahoma seller sold components to an out-of-state reseller that was not engaged in business in California. At the reseller's direction, the seller delivered the components to a California company for assembly. That fabricator worked for the reseller and shipped the completed property to the reseller's customer outside California.

California concluded that the second paragraph of section 6007 did not redefine the seller's transaction as a retail sale. The California fabricator accepted delivery on behalf of the out-of-state reseller, not on behalf of the end user, and the seller did not deliver the property to the end user or its agent.

The source cautioned that the result would differ if the California fabricator assembled the property for the out-of-state end user rather than for the reseller. In that case, section 6007 could apply unless the property was not regarded as used in California under section 6009.1.

Common questions

Did delivery to a California location alone trigger the drop-shipment rule?

No. Who the California recipient represented was decisive under the stated facts.

Why was the seller not treated as the retailer?

The fabricator received and assembled the components for the reseller, then sent the finished property to the out-of-state customer.

What fact would have changed the analysis?

If the California assembler acted for the end user, the seller could be treated as the retailer under section 6007.

Citations and references

• California Revenue and Taxation Code sections 6007, 6009.1, 6051, 6201, and 6401
• California Sales and Use Tax Regulation 1620

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/495-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/495-0845.pdf

Original ruling text

495.0845

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Tele: (916) 322-2976
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

April 20, 1995

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

Ms. H--- L--B--- M---, Inc.
Industrial Division
XXXX --- XXth Street
P. O. Box XXXXXX
---, OK XXXXX-XXXX
Re: SC OHC XX-XXXXXX
Dear Ms. L---:
This is in response to your letter dated February 8, 1995 regarding the application of tax to your sales of tangible personal property that you drop ship into California. You state: "We recently processed an order from the M--- Company, --- CO which was drop shipped to their customer, S--- I--- in ---, CA. I learned that they did not have a resale certificate for the State of California and I charged the tax accordingly. "Now I have received a note from Mr. R--- K--- of M--- C--- saying that the order was not taxable as the S--- C--- was not the user or consumer of the order. This was in response to my requesting the proper certificate or documentation. He did not pay the taxes." You have attached the letter from Mr. K---, dated January 30, 1995. In that letter, Mr. K---- states that the user and consumer of the items purchased from M--- is A--- T---, located in Minnesota. That is, M--- purchased the property from you for resale to A---, not to S--. M--- asked that you ship the items to S--- for assembly. After workers at S--- assembled the components, the assembled products were sent to the end-user in Minnesota.

Ms. H--- L---

-2-

April 20, 1995
495.0845

Retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless specifically exempt by statute. (Rev. & Tax. Code § 6051.) A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) When sales tax does not apply, such as when sales take place outside of California, the use tax, measured by the sales price of the property sold, applies to the use of property purchased from a retailer for storage, use, or other consumption in California. (Rev. & Tax. Code §§ 6201, 6401, Reg. 1620.) As explained in our previous letters to you dated October 12, 1993 and November 16, 1993, the second paragraph of Revenue and Taxation Code section 6007 applies to transactions in which B--- M--- sells property to retailers not engaged in business in California but drop ships the property directly to the California purchaser of the out-of-state retailer if that purchaser is the consumer of the property. Under that paragraph, your sale which would otherwise be regarded as a sale for resale would be redefined as a retail sale, and you would be required to collect the applicable use tax from the California end-user, measured by the marked-up price charged to the California end-user, and pay that tax to this state. However, our understanding of the facts in the present situation is that you sold the property to M--- and delivered it to S--- in California pursuant to M---'s instructions. S--contracted with M--- to assemble the property and then send it to M---'s purchaser, A---, the outof-state end-user. S--- accepted delivery from you on behalf of M---. That is, you did not deliver the property to the end-user. Therefore, the second paragraph of section 6007 does not apply. Please note that if S--- or another California entity were to assemble the property on behalf of A--- rather than on behalf of M---, the second paragraph of section 6007 would apply. Under those circumstances, you would be required to collect the tax unless the property would not be regarded as used in California. (See Rev. & Tax. Code § 6009.1.) If you have further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Staff Counsel
KWC:plh
cc:

Out-of-State Sacramento District Administrator - OH