Avalara > Blog > Ecommerce > Who’s liable for sales tax when a marketplace sale in California involves a drop shipper?

Who’s liable for sales tax when a marketplace sale in California involves a drop shipper?

  • Sep 9, 2020 | Gail Cole

employees-warehouse-shipping

The California Department of Tax and Fee Administration (CDTFA) is working to reconcile its drop shipment regulation with the state’s marketplace facilitator law. Due to inconsistencies between the two, the identity of the retailer responsible for collecting and remitting sales tax in a marketplace or drop shipping scenario may not be clear.

California’s Marketplace Facilitator Act (MFA) provides that “a marketplace facilitator … is considered the seller and retailer for each sale facilitated through its marketplace” on and after October 1, 2019. However, because the MFA doesn’t mention drop shipping, resales, or true retailers, it’s unclear how marketplace sales figure into California’s drop shipment regulation (Regulation 1706). The CTDFA therefore recommends amending Regulation 1706 to:

  • Clarify that certain marketplace sales are not drop shipment transactions
  • Clarify when drop shippers may calculate the retail selling price of a drop shipment based on their sales price to the “true retailer” (plus a markup)
  • Provide more guidance on how a person can overcome the presumption that they’re a drop shipper

Read on for more details.

Calculating sales tax on drop shipments

Regulation 1706 doesn’t define or even mention “marketplace facilitator,” “marketplace seller,” or “marketplace sales,” but it does define the following:

  • “Retailer engaged in business in this state” includes any person who meets the definition of a retailer under Revenue and Taxation Code 6203; this includes retailers with a physical presence in California and remote retailers with economic nexus with California (i.e., more than $500,000 in sales of tangible personal property in California in the current or preceding calendar year)
  • “True retailer” is a retailer who is not a retailer engaged in business in this state and who makes a sale of tangible personal property to a consumer in California
  • “Drop shipper” means and includes a person who makes a drop shipment of tangible personal property
  • “Drop shipment” means a delivery of tangible personal property to a California consumer pursuant to the instructions of the true retailer; this generally involves two separate transactions
  • The true retailer contracts to sell property to a consumer

The true retailer then purchases the property from a supplier and instructs the supplier to ship the property directly to the consumer; the supplier is generally the drop shipper

Under Regulation 1706, a drop shipper that’s also a retailer engaged in business in California is reclassified as the retailer of the transaction. Accordingly, as the retailer, the drop shipper is liable for sales and use tax. A drop shipper may overcome the presumption that it’s liable for tax by accepting a valid resale certificate from the person to whom the property is delivered.

If the drop shipper doesn’t know how much the true retailer charged the customer, it should base tax on what it charged the true retailer, plus a 10% markup. A drop shipper may use a lower markup percentage only if it can document that lower amount “accurately reflects the retail selling price charged by the true retailer to the California consumer.”

When a marketplace facilitator is the retailer but not the “true retailer”

Under the MFA, a marketplace facilitator is the retailer responsible for collecting and remitting sales tax — but it isn’t the “true retailer.” Thus, according to the CDTFA, when a marketplace seller contracts to purchase property from a supplier and instructs the supplier to deliver the property to the consumer, “the supplier is not a drop shipper because it is not delivering the property pursuant to a retail sale by a true retailer.”

The CDTFA would like to:

  • Add definitions for “marketplace,” “marketplace facilitator,” and “marketplace seller” to Regulation 1706
  • Add a new section to Regulation 1706 clarifying that, as of October 1, 2019, marketplace sales for which a marketplace facilitator is the retailer are not drop shipments
  • Add an example to Regulation 1706 illustrating how a marketplace sale is not a drop shipment
  • Add a section to Regulation 1706 clarifying that, effective July 1, 2021, a drop shipper should use the actual price charged to the consumer to calculate sales tax if the actual selling price is known
  • Add a new section to Regulation 1684.5 to help marketplace facilitators and sellers determine who is the retailer responsible for collecting and remitting sales tax on a marketplace sale

Scott Peterson, vice president of Government Relations at Avalara, notes that California could accomplish the same thing by simply repealing the state’s drop shipper rule. He explains, “The state requires many remote sellers, marketplaces, and drop shippers to collect. Marketplaces and drop shippers collect for small remote sellers that qualify for the small seller exception. By amending Regulation 1706, the state is treating drop shippers like marketplaces, imposing a tax collection obligation on them when they can’t impose tax on the true retailer.”

Additional details about the proposed amendments are available in this Discussion Paper on Regulation 1706, Drop Shipments. Taxpayers interested in learning more are invited to participate in a teleconference on September 15, 2020, at 1 p.m., and to submit comments by September 29, 2020.

This is complicated stuff. Automating sales tax collection, remittance, and returns makes it less so.


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals.