Could a California supplier accept resale certificates from the in-state recipients of drop shipments for an out-of-state reseller without California nexus?

Plain-English summary

A New York reseller without California nexus bought inventory from a supplier with a California office and sometimes directed the supplier to ship goods to the reseller's California customers. The supplier wanted to charge tax because the New York company lacked a California resale certificate.

If the New York reseller's transfers to the California customers were retail sales, section 6007 deemed the supplier the retailer and made it responsible for the applicable sales or use tax.

The supplier could instead accept timely, valid California resale certificates in good faith from the California recipients. The customers could send the certificates directly to the supplier or route them through the New York reseller; either method could relieve the supplier.

The supplier was not required to accept the certificates and could treat its transfers as retail sales. If a California customer paid tax and then resold the property before use, the source said the customer could claim a tax-paid-purchases-resold deduction.

Common questions

Did the out-of-state reseller's non-California certificate relieve the supplier?

No. The source relied on valid California certificates from the in-state recipients.

Could certificates pass through the out-of-state reseller?

Yes. They could be delivered directly or through the reseller.

Was the supplier obligated to accept them?

No. The supplier could refuse and treat the sale as retail.

Citations and references

• California Revenue and Taxation Code sections 6007, 6051, 6091, 6201, and 6241
• California Sales and Use Tax Regulation 1701

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/495-0952.pdf

Original ruling text

495.0952

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District, Kentfield

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

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

December 14, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

X---------------------------

Dear X----------------------:

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, X--------------, who has an office in the state of California, from which we purchase a large portion of our inventory. On occasion, we have requested X--------------- to drop ship our orders to customers in the state of California as opposed to shipping them to us in New York. X--------------- 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 X--------------- 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 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 X--------------- 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, X--------------- 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 X--------------- 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 X---------------. 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 X-------------- to accept them from your customers, the persons in California to whom X--------------makes the deliveries. They may be provided directly from your customers to X---------------, or they may be provided through you. In either case, the timely and good faith acceptance of valid California resale certificates will relieve X--------------- from liability for any sales or use taxes. We note, however, that X--------------- 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.) If you have further questions, please contact me. Sincerely yours,

Donald L. Fillman
Tax Counsel
DLF:wk
bc:

Out-of-State District Administrator