Innovation Line is required by California State Law to collect Sales Taxes on any order delivered within the State, unless our (distributor) customer has a valid CA Resale Certificate. Distributors who are not CA residents are subject to the same law and must obtain a valid CA Resale Certificate, or charge and collect the applicable CA sales taxes, for those orders we drop ship within CA on their behalf. See CA Sales and Use Tax Regulations, Article 18, Regulation 1706. Additionally, because we do not know the retail sales price to the end user, CA law further requires that we add 10% to the wholesale cost on our invoice, and then charge the applicable CA sales tax on that amount.** All sales taxes we collect from you are remitted to the State of California sales tax authorities.

There is oftentimes confusion about this policy. Two questions come up: 1) Which State collects the Sales Tax – an end user must always pay a sales tax, but they are only required to pay to the State where the goods were delivered. They do not have to pay Sales Taxes in their own State, or in the Distributor’s State, if the goods were not delivered to either of those States, and 2) Does a distributor need a CA Resale Certificate – the answer is no, but they will have to charge and collect sales tax on all drop shipments within the State and pay the tax to the supplier who drop shipped the goods in CA on their behalf. The CA supplier remits the sales tax to the State of CA sales tax authorities.

Therefore, our invoice for any goods we drop ship into the State of California will include the applicable CA sales tax as explained above. You should charge your customer this amount of sales tax and when you pay us, we will remit the same to the CA authorities pursuant to the law.

I hope this letter helps explain the CA State Sales Tax law to you. If you have any questions, please feel free to call our Credit Department at the number below. The following was taken directly from the CA State Board of Equalization Website re Drop Shipments and Sales Tax and further explains the Supplier’s responsibilities to collect Sales Tax:

I (the supplier) make drop shipments on behalf of out-of-state retailers. Am I liable for sales tax?

If you make drop shipments or courtesy deliveries to consumers in California on behalf of out-of-state retailers, you are not liable for tax if the out-of-state retailer holds a California seller's permit or a Certificate of Registration - Use Tax. An out-of-state retailer who is required to hold either permit is considered the retailer and is liable for tax. However, you are considered the retailer and are generally liable for tax if:

• The out-of-state retailer is not required to hold a California seller's permit or Certificate of Registration-Use Tax, and
• The retail sale of the property is subject to California sales and use tax

Regulation 1706, Drop Shipments. This regulation includes a provision that for sales and use tax reporting purposes, a drop shipper may calculate the retail selling price of its drop shipments of property based on its selling price of the property to its direct customer, the out-of-state retailer, plus a markup of 10 percent.

** This part of the law is also confusing, but CA is only requiring that we add 10% to our wholesale invoice amount and not that we charge tax for the actual amount you sold the order for. Your customer is only paying sales tax on 110% of our cost to you, and not the retail price they purchased the products for.