What is a drop shipment?
A drop shipment occurs when a customer orders an item from a seller “S” (that does not have the item in stock). The seller, “S” then orders the item from another business “M” (usually a manufacturer) and has M deliver the item directly to S’s customer. This article assumes the sale to the customer is a retail sale.
How Washington taxes apply to the seller “S” and the manufacturer “M.”
If S’s customer is located in Washington:
M is making a wholesale sale to S. Therefore, M is not required to collect sales tax on that sale even if M delivers the goods to S’s customer (the buyer) in Washington. M needs to document the wholesale nature of the sale by obtaining one of the following from S:
If M has nexus with Washington, M would owe wholesaling business and occupation (B&O) tax on the drop shipment delivered to the Washington customer.
If S has nexus with Washington, S would owe retailing B&O tax and would be required to collect and remit sales tax from the Washington customer.
If S’s customer is located outside of Washington:
M is making an exempt interstate wholesale sale to S. M needs to document the exempt nature of the sale by keeping shipping records that demonstrate the goods were delivered to S’s customer outside of Washington. If M has nexus with Washington, M should report the sale under the wholesaling classification of the B&O tax and then take an interstate deduction for the amount of the sale.
S is making an exempt interstate retail sale to its customer. If S has nexus with Washington, S should report the sale under both the retailing classification of the B&O tax and retail sales tax classification and then take interstate deductions from each of these taxes. S needs to document the exempt nature of the sale by keeping records that demonstrate M was instructed to deliver the goods directly to S’s customer outside of Washington.