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We are a FL dealer for a CA company. We have a FL exemption certificate. We have a CA customer who wants item drop-shipped to them in CA. Do we charge sales tax?

Full Question: We are a dealer in Florida for a California based lighting company. We have a sales tax exemption certificate for the state of Florida We have a customer in California who wants the equipment drop shipped directly from the California lighting company to them in California. Do we have to charge sales tax to our customer? If so, is there a way to get sales tax exemption in California even though we are based in Florida?

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Answer:

Diane Yetter photoIn a drop shipment transaction, the retailer does not have the inventory to deliver to their customer. Rather, they contact their supplier to request them to ship the goods directly to their customer. The supplier will invoice the retailer and the retailer will invoice their customer. The supplier (shipper) of the goods is required to collect sales tax on the invoice to the retailer if they ship into a state where they are registered if they do not have a valid resale certificate from the retailer for that state. States vary in their rules regarding the appropriate exemption documentation that can be provided in order to substantiate a sale for resale in drop shipment situations. Some states will honor a retailer's out of state registration while others do not. California will not so without registering in California to be able to issue a valid resale certificate the California lighting company will have to charge you tax. If you choose not to register, you can not invoice the tax charged to you directly. You can include it as a component of your cost but your customer would still owe use tax on the purchase price. If you do register, you will need to charge sales tax on all sales into California, not just the ones through this supplier when they drop ship into California. The general rule that applies in states is that in order for a registered seller to not collect tax is that they must have a valid exemption certificate from their customer. Typically that must be a certificate from the ship to state, or at least one that is deemed valid by the ship to state. Drop shipment transactions raise many issues as often the retailer is not registered in the ship to state but the supplier/shipper is. Therefore the supplier/shipper is obligated to collect tax on the drop ship transaction unless valid exemption documentation is provided. Luckily many of the states recognize the drop shipment transaction as a sale for resale which is exempt from sales/use tax and have come up with alternate documentation rules. This could vary from the retailer's home state resale certificate, the MTC Multi-Jurisdictional Exemption Certificate, the Streamlined Sales Tax Exemption Certificate, the ship to state resale certificate with the home state number or a no nexus statement or other alternative documentation that demonstrates that the transaction truly is a sale for resale. In some states, if the retailer's customer is claiming an exemption, this certificate could be "passed through" to the supplier/shipper to claim the exemption. See drop shipments and the tax consequences link for additional information and/or to order the CCH book Drop Shipments Taxation, Compliance and Planning written by Diane Yetter.

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