Drop Shipments (Publication 121)
Amount of Tax Due
What if the drop shipment involves more than one California retailer?
It is not uncommon for drop shipments to involve more than one retailer. Generally, the first retailer engaged in business in California in the series of drop shipment transactions is liable for the sales tax. The first retailer is the in-state retailer that received the order from the out-of-state retailer. The first retailer knows the selling price to the true retailer and is required to collect, report, and pay the appropriate tax accordingly.
Example
ABC Supplies (ABC), an out-of-state retailer who is not registered to collect and pay California use tax, sells a doghouse to a California consumer. ABC then buys the doghouse from XYZ, a California retailer, and directs XYZ to ship the doghouse to the California consumer. However, XYZ does not have a doghouse in stock and must buy one from 123, who is also a California retailer. XYZ directs 123 to deliver the item to the California consumer.
XYZ is the first retailer (drop shipper) and owes the sales tax even though 123 (second drop shipper) is engaged in business in California. XYZ is the first California retailer engaged in the series of drop shipment transactions beginning with the purchase by the true retailer (ABC).
Revision July 2021