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If VA dropshipper registers for resale exemption certificate in CA, is there CA income tax exposure?

Full Question: We are an online retailer based in VA. Our product will dropship to all 50 states direct from a manufacturer with facilities in VA and PA. We are clear on our compliance issues there. We also sell accessories with our primary product that will dropship from a supplier in CA, where we do NOT have nexus. In order to obtain a CA resale exemption certificate, we're required to register with the CA Sec of State as a foreign corp. Will that expose us to CA income tax?

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Answer:

Diane Yetter photoThe determination as to what is required to support a purchase for resale in a drop shipment transaction can be challenging. The correct state to look at is the ship to state. The shipper will be required to collect tax if they have nexus in the ship to state unless the sold to (retailer) can provide acceptable resale exemption documentation. It sounds like you have a supplier in CA that will be shipping to customers in CA. If you are not registered in CA to collect sales tax, they will be required to charge you sales tax. In order to qualify to issue a valid CA resale certificate you need to register with the CA State Board of Equalization for a use tax permit. I do not believe this will require a registration with the CA Secretary of State if you don't have any nexus with CA. Once you have the use tax permit, you will be required to collect CA tax on all taxable sales to your customers within CA. If you chose to register with the CA Secretary of State for other business purposes, you may be subject to the CA Franchise Tax which has a minimum tax of $800 per year. However, you will want to validate this with an income tax specialist as we do not specialize in this area. BTW - For more information on drop-shipments, please consider our Tax Implications of Drop-Shipments Webinar or the book we wrote (published by CCH) Drop Shipments: Taxation, Compliance and Planning. If you need further assistance with this matter, please feel free to contact us directly.

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