Fulfillment centers are warehouse facilities where orders for tangible personal property (goods) are packaged and shipped to customers. With many sellers understanding the increase in profitability that may be generated from making online sales, they are taking the opportunity provided by changing technology to market their goods over the Internet. To keep up with the expansion of their growing businesses, sellers are outsourcing some of their responsibilities, such as warehousing and shipping to third party fulfillment centers. This allows sellers to minimize the costs associated with maintaining a physical space for their inventory, reduces the time spent on fulfilling orders, and allows goods to get to their customers quicker.
California Fulfillment Centers
In general, when a person operates a fulfillment center, and fulfills an order on behalf of the seller of the goods, the fulfillment center is performing a service and not selling goods. If the fulfillment center only provides this service for the owners of the goods and does not sell goods, the fulfillment center is not required to register with the California Department of Tax and Fee Administration (CDTFA), nor is it responsible for reporting and paying the sales or use tax to the CDTFA.
As a service provider, the fulfillment center is generally considered the consumer of packaging materials and containers or parts of containers it uses to preserve, protect, and contain the goods that it packs, loads, and/or ships on behalf of the seller of the goods. Therefore, tax applies to sales of packaging material and containers to the fulfillment center. Examples of packaging materials and containers include:
- Bracing materials
- Car strips
- Ice and dry ice
With respect to containers or parts of containers, in general, these items may not be resold unless the fulfillment center meets the specific requirements provided by Regulation 1630, Packers, Loaders and Shippers, to be considered a retailer.
If you operate a fulfillment center in California and you are not required to hold a California seller's permit, you still may be asked to provide information regarding the sellers that use your fulfillment services. Government Code section 15618, Examination of records, provides the CDTFA with the authority to examine the books, accounts, and papers of all persons required to report to the CDTFA, or have knowledge of the affairs of those required to report to the CDTFA.
As an exception to this general rule, when a fulfillment center enters into an agreement to fulfill sales on behalf of the owner of the goods, the transaction may be considered a consignment sale and the fulfillment center may be responsible for reporting and paying tax. A consignee is a person who has:
- Possession or control of the goods owned by another person, and
- The power to transfer ownership to the buyer without further action on the part of the owner.
If both of those elements are met, the fulfillment center in this case is the consignee and the owner of the goods is the consignor. As a consignee, the fulfillment center is considered to be the retailer of the goods sold on consignment and is required to obtain a California seller's permit or register with the CDTFA to report and pay the applicable tax to the CDTFA on these sales.
You, as the fulfillment center, may issue form CDTFA-230, General Resale Certificate, to the owner when receiving the goods you sell on consignment in your regular course of business operations, modifying the language used in the certificate from referring to the “purchased” goods to the goods “taken on consignment.” For more information regarding consignment sales, please see publication 114, Consignment Sales.
When Fulfillment Centers Are Sellers
When a person that operates a fulfillment center is located or engaged in business in California sells its own goods, even if only for resale, in addition to providing fulfillment services, the fulfillment center is required to register with the CDTFA for sales and use tax purposes. Fulfillment centers may also be responsible for other fees; your online application will determine what licenses or permits with the CDTFA may be required. Please visit our Registration – Main Menu.
Even if the fulfillment center is making sales for resale, it may be considered the retailer of the goods sold if it is delivering goods directly to consumers in California in a drop shipment scenario. Typically, drop shipment transactions involve two businesses, two sales and one consumer:
- The “true retailer” is an out-of-state business that is not engaged in business in California or otherwise registered to collect California sales or use tax. The true retailer contracts to sell goods to the California consumer.
- The “drop shipper” is engaged in business in California and sells the goods to the true retailer, but ships the goods directly to the California consumer on behalf of the true retailer.
- The “consumer” in California buys and receives the goods.
Under Revenue and Taxation Code section 6007, Retail Sale, and Regulation 1706, Drop Shipments, if a transaction is a drop shipment the drop shipper is reclassified as the retailer, and is required to report and pay the applicable tax.
If you are a fulfillment center in California and sell goods to a “true retailer” and drop ship the goods to a California consumer, you are responsible for reporting and paying the applicable tax on the retail selling price of the goods.
As is generally the case, tax does not apply to a transaction if you have documentation showing that the sale to the California consumer qualifies for an exemption or exclusion from the tax. For more information on exemptions or exclusions, see publication 61, Sales and Use Taxes: Exemptions and Exclusions.
For additional information regarding drop shipments, please see publication 121, Drop Shipments.
Sellers Using California Fulfillment Centers
Many sellers of goods make sales over the Internet. All California-based sellers are required to register with the CDTFA and file sales and use tax returns. If you are an out-of-state seller that uses a California fulfillment center to store your inventory for delivery to consumers in California, you are also required to register with the CDTFA and file sales and use tax returns. You are responsible for reporting and paying the tax to the CDTFA on your retail sales to California consumers. You may also be responsible for other fees; your online application will determine what licenses or permits with the CDTFA may be required. To register, please visit our Registration – Main Menu.
Sellers located in California making retail sales in this state are required to register with the CDTFA for a seller's permit. As a California seller, you are responsible for reporting and paying the tax on your retail sales made in California. Depending on the type of goods you sell, you may also be responsible for reporting and paying other taxes or fees on these sales.
If you are not already registered, you must obtain a California seller's permit by visiting Registration – Main Menu. Please see publication 107, Do you Need a California Seller's Permit, for more information.
Please note that California sales or use tax does not apply to the sales of goods when, pursuant to the contract of sale, the goods are required to be shipped, and are so shipped, to a point outside California by your own facilities, or by a common carrier. These sales are considered to be sales in foreign and interstate commerce. For additional information regarding sales in foreign and interstate commerce, please see publication 101, Sales Delivered Outside California.
Generally, when a sale occurs outside of California, the sale is not subject to sales tax. Instead, the sale is subject to use tax if the goods are sold for use in California, and generally the California consumer is responsible for the payment of the use tax.
However, a seller located outside of California that stores inventory in a California fulfillment center is considered to be engaged in business in California. Retailers that are engaged in business in California are required to register with the CDTFA, file sales and use tax returns, and pay tax on sales to consumers in California. Out-of-State retailers with a location in California will need to obtain a seller's permit, while out-of-state retailers without a location will need to obtain a Certificate of Registration- Use Tax.
Our online registration system will ask a series of questions to determine the proper permits and licenses you will need. When registering online, the system will ask if you have a “retail location, stock of goods, or warehouse in California.” If your inventory is stored at a fulfillment center with other inventory not owned by you, you will select “No”; to that question. Once complete, the system will indicate you are registering for a Certificate of Registration- Use Tax
If you do not believe your business activities require you to register or if you need help determining if you are engaged in business in California, please contact our out-of-state office at:
California Department of Tax and Fee Administration
Western States Office
3321 Power Inn Rd., Ste. 130
Sacramento, CA 95825-3893
We can help determine if you are engaged in business in California and confirm whether or not you need to register with the CDTFA. Even if you are not required to register, you may voluntarily register for a Certificate of Registration – Use Tax to collect and pay use tax as a convenience to your California customers.
To register with the CDTFA, visit Registration – Main Menu. For additional information please see our Tax Guide for Out-of-State Retailers and publication 77, Out-of-State Sellers: Do You Need to Register with California?
If you have additional questions about fulfillment centers, please call our Customer Service Center at 1-800-400-7115 (TTY 711). Representatives are available Monday through Friday, (except state holidays), from 8:00 a.m. to 5:00 p.m. (Pacific time).
For further information on these topics please see publication 109, Internet Sales.