17 Oct 2007
2 min read

Double Taxation On Drop Ships

Explore the potential issue of double taxation on drop-shipped items for companies that purchase products for delivery. Discover how state laws differ on this matter and the impact it can have on your business.
Table of contents

So You Don’t Drop-Ship Items To Your Customers? You Still May Be A Victim Of Double Taxation.

In our last newsletter we discussed the sales tax implications for manufacturers and/or distributors who drop ship items to customers. We also offered a state-by-state chart showing how each state handles tax on drop-shipped items. This week we’re going to explore the other side of the issue.

Almost All Companies Purchase Drop-Shipped Items

It’s more common for companies to purchase items and have it delivered rather than going going to retail locations. Many of these purchases are drop-shipped items. For example, your company may buy supplies from the catalog of a local supplier. But in fact, that supplier might be just a catalog company and the product is drop-shipped to you, their customer. They might never even touch the product.

States Commonly Collect Tax Twice On Drop-Shipped Items

As we discussed last time, some states require the distributor to pay tax on the transaction at the time the product is drop-shipped, however, most companies accrue tax on these items to satisfy their use tax obligation. If you haven’t picked up on it already, when the distributor pays tax on a shipment and the user pays tax on the same order, then the state is collecting the tax twice.Double taxation is not legal in any state.

Here’s An Example:

In California, if a manufacturer is registered in the state but a distributor is not, the manufacturer is required to collect sales tax on the sale to the distributor. In fact, they collect tax on the sale after an additional 10 percent markup.

Let's say Your Company purchases computer equipment from Distributor located in Washington. Distributor arranges for Manufacturer to ship the product on their behalf to you. Manufacturer is registered in every state. Distributor is not registered in California. Manufacturer is required to collect the California tax after adding an additional 10 percent markup to the price charged from Distributor. Distributor does not show the tax to you. Your Company is registered in California and accrues tax on the purchase to satisfy your use tax obligation. Your Company and Distributor both paid tax on the sale to California. Double taxation is alive and well!

State Laws Vary Widely On Drop-Ships

Like anything else in state and local tax, these laws vary from state to state. The scenario above is not the same in every state. A thorough review of state laws will help in determining the possibility of credits available.

Review For Credits Or Refunds

A quick review by a state and local tax firm like Peisner Johnson & Company is the most effective way of conducting this type of review. We often conduct these type of reviews on a performance basis. Please contact us if you would like more information, or to be contacted regarding our FREE Refund Review.


In this article, we've delved into the potential issue of double taxation that even companies not directly involved in drop-shipping may encounter. We've highlighted how state laws differ on this matter, emphasizing that double taxation is not legally permissible. State laws governing drop-ships vary widely, making it crucial to review them for potential credits or refunds. To address these complex matters, a state and local tax firm like Peisner Johnson & Company can offer valuable assistance, often on a performance basis. If you seek further information or wish to explore our FREE Refund Review, please don't hesitate to contact us.
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