The California Department of Tax and Fee Administration (Department) has given notice that it proposes to amend California Code of Regulations, title 18, section (Regulation) 1706, Drop Shipments. Regulation 1706, subdivision (c) provides that a drop shipper making a drop shipment must report and pay tax measured by the retail selling price of the property paid by the California consumer to the true retailer, unless the sale and use of the property are otherwise exempt. The proposed amendments clarify that marketplace sales are generally not drop shipment transactions and provide more guidance about how a person can overcome the presumption they are a drop shipper.
The written comment period ends at 11:59 pm (PDT) on October 25, 2021. The Department has not scheduled a public hearing to discuss the proposed regulatory action. However, any interested person or his or her authorized representative may submit a written request for a public hearing no later than 15 days before the close of the written comment period, and the Department will hold a public hearing if it receives a timely written request.
The text of the statement of reasons and proposed amendments to Regulation 1706 can be found here.
On April 25, 2019, the Legislature enacted Assembly Bill No. (AB) 147 (Stats. 2019, ch. 5). AB 147 added the Marketplace Facilitator Act (MFA) to the Revenue and Taxation Code (“RTC”) to address sales of tangible personal property through marketplaces. The MFA became operative October 1, 2019. (RTC, § 6049.5.) The MFA defines the terms “marketplace,” “marketplace facilitator,” and “marketplace seller.” (RTC, § 6041.)
A marketplace facilitator that is registered with the Department or required to register with the Department for a seller’s permit or Certificate of Registration – Use Tax that facilitates a retail sale of tangible personal property by a marketplace seller on or after October 1, 2019, is the retailer selling or making the sale of the tangible personal property sold through its marketplace under RTC section 6043. When a marketplace facilitator is the retailer for a retail sale of tangible personal property to a California consumer by a marketplace seller under RTC section 6043, the marketplace facilitator is not a true retailer. As such, if the marketplace seller contracts to purchase the property from a supplier and instructs the supplier to deliver the property directly 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 Department proposes adding new subdivision (c) to Regulation 1706 titled “Marketplace sales” to clarify that these marketplace sales are not drop shipments. The Department also proposes adding a new example to Regulation 1706 illustrating a marketplace sale that is not a drop shipment. The Department has determined that these amendments are necessary to prevent these marketplace sales from being taxed as drop shipments.
Among the amendments to Regulation 1706, the Department proposes amending subdivision (c) as follows:
(c) Marketplace sales. When a marketplace facilitator is the retailer for a retail sale of tangible personal property to a California consumer by a marketplace seller under Revenue and Taxation Code section 6043, the marketplace facilitator is not a true retailer. In addition, if the marketplace seller contracts to purchase the property from a supplier and instructs the supplier to deliver the property directly to the consumer, the supplier is not a drop shipper. See Regulation 1684.5, Marketplace Sales, for more information about how to determine who the retailer is for purposes of a marketplace sale.
The proposed amendment clarifies that marketplace sales are generally not drop shipment transactions.