Who collected use tax in a multi-party out-of-state drop shipment when the final seller to the consumer was a California retailer?

Plain-English summary

An out-of-state company with California nexus sold merchandise to an out-of-state no-nexus buyer. That buyer resold to a California company, which resold to the California consumer. The first company shipped directly from outside California to the consumer.

Because the sale and delivery occurred outside California, use tax rather than sales tax applied. The consumer was liable, and a retailer engaged in business in California had the collection duty.

If the California company was the actual retailer selling to the consumer and was engaged in business in California, section 6007 did not deem the upstream drop shipper to be the retailer. The California company had to collect use tax measured by the final retail price charged to the end user.

But the California company had not given the drop shipper a resale certificate containing a California seller's permit number. The upstream drop shipper therefore had the burden of proving that the California company was in fact a retailer engaged in business in the state; otherwise, the drop shipper risked being deemed the retailer.

Common questions

Was sales tax or use tax involved?

Use tax, because the described sale and physical delivery occurred outside California before shipment to the consumer.

Who collected if the final seller was a California retailer?

That final seller collected use tax on the end-user price.

Why did the upstream drop shipper still face risk?

It lacked a California permit-number resale certificate and therefore had to prove the final seller's California retailer status.

Citations and references

• California Revenue and Taxation Code sections 6006(a), 6007, 6010.5, 6051, 6201, 6202, 6203, and 6401
• California Commercial Code section 2401
• California Sales and Use Tax Regulations 1620 and 1668

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/495-0893.pdf

Original ruling text

495.0893

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 324-2614
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

January 17, 1997

KATHLEEN CONNELL
Controller, Sacramento
___
JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_____
E. L. SORENSEN, JR.
Executive Director

Ms. M--- M--Tax Administrator
M--- T--- Corporation
P.O. Box XXXXX
---, Washington XXXXX-XXXX
Re:

M--- T--- Corporation
Account No. SS -- XX-XXXXXX

Dear Ms. M---:
This is in response to your letter dated October 22, 1996, in which you request a legal opinion regarding the application of tax to drop shipment transactions. Based on the invoices you have provided for our review, our understanding is that on June 25, 1996 and July 12, 1996, M--- T--- Corporation (“M---”) sold merchandise to T--- T---, Inc. (“T---”), a corporation located in Cincinnati, Ohio, and not engaged in business in California. T--- resold that merchandise to C--- M--- located in ---, California, who in turn resold that merchandise to A--- G--- Ins. (“A---”) located in --- ---, California, the consumer. DISCUSSION A retailer owes sales tax on its sales of tangible personal property in California, measured by gross receipts, unless the sale is 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.) A retail sale also includes certain drop shipments. (Id.) 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.) You state that the merchandise in question was shipped by M--- from an out-of-state location directly to A---, the consumer located in California. Title passes from the vendor, and thus the sale occurs, no later than the time at which the vendor completes its performance with respect to physical delivery of the property. This generally occurs upon the seller's delivery of the property to a common carrier for shipment to the customer. (Cal. U. Com. Code § 2401;

Ms. M--- M---

-2-

January 17, 1997
495.0893

Rev. & Tax. Code §§ 6006(a), 6010.5.) Accordingly, in drop shipment sales taking place outside of California, as in this case, the use tax, rather than the sales tax, applies. Although the purchaser is liable for the use tax, a retailer engaged in business in this state is required to collect the use tax from its purchasers and to pay the tax to this state. (Rev. & Tax. Code §§ 6202, 6203.) The second paragraph of Revenue and Taxation Code section 6007 redefines sales which would otherwise be regarded as sales for resale to be retail sales when a person who is a retailer engaged in business in this state drop ships property, or has property drop shipped, to a California consumer pursuant to a retail sale made by a retailer not engaged in business in California. When the drop shipment comes within the second paragraph of Section 6007, the drop shipper who is a retailer engaged in business in this state is deemed to be the retailer with respect to such sales for purposes of the California Sales and Use Tax Law. In the present case, our understanding is that the actual sale of the merchandise to the California consumer, A---, was by C--- M---. If C--- M--- is a retailer engaged in business in this state, the second paragraph of section 6007 does not apply and M--- would not have any tax liability resulting from the transaction at issue. Instead, the retail sale is the sale of the merchandise from C--- M--- to A---. Thus, assuming that C--- M--- is a retailer engaged in business in California, C--- M--- must collect the use tax with respect to the drop shipments of the merchandise for use in this state by A---. The measure of tax is the retail sales price charged to the California end-user. We note that since C--- M--- did not provide M--- with a California resale certificate, in order for M--- to avoid being deemed the retailer with respect to the sales at issue under the second paragraph of Section 6007, M--- has the burden of proving that C--- M--is in fact a retailer engaged in business in California. If you have any further questions, please write again. Sincerely,

Sophia H. Chung
Tax Counsel
SHC:cl
Enclosure
cc:

(Sales and Use Tax Regulation 1668)
Out-of-State District Administrator