What Is Drop Shipping?

Drop shipping generally involves two separate sales for one customer order. California's sales tax regulation on drop shipments describes it this way: the retailer contracts to sell the product to a consumer, then contracts to buy that product from a supplier and instructs the supplier to ship it directly to the consumer. The supplier is the drop shipper.

Shopify's help center describes the same flow from the retailer's side: the order details flow from the customer to the Shopify store, then to the supplier, and the supplier handles the logistics while keeping the store's branding.

Both are ways a manufacturer or distributor sells through retailers. The difference is who holds the stock and who ships to the end customer:

• Wholesale: the retailer buys inventory up front, stocks it and ships or sells it to its own customers.
• Drop shipping: the retailer holds no inventory for that item. Each time it makes a sale, it buys one unit from the supplier, and the supplier ships that unit to the retailer's customer.

For the supplier, a drop ship program means many single-unit shipments to addresses it does not own, packed and documented under someone else's brand.

California's rules, which cover California sales and use tax only, treat a drop shipment as generally involving two separate sales. Under Regulation 1706, a retailer that is not engaged in business in California and sells to a California consumer is the true retailer, and a drop shipper that is a retailer engaged in business in California is reclassified as the retailer and must report and pay tax measured by the retail selling price the California consumer paid, unless the sale is exempt. The regulation has its own rules for marketplace sales and for chains of more than two sales.

For cross-border orders, Shopify notes that tax and customs obligations vary by region. For example, a store selling to EU customers from a supplier outside the EU might need to register for the Import One-Stop Shop (IOSS) scheme. This is general information, not tax advice.

A furniture manufacturer sells an outdoor chair to a home goods retailer for $120. The retailer lists it on its online store for $200. A customer orders one chair, the retailer buys it from the manufacturer, and the manufacturer ships it directly to the customer with the retailer's packing slip.

• Retailer's gross margin: $200 - $120 = $80 a chair
• Manufacturer's revenue: $120 a chair, with no inventory moved into the retailer's warehouse

Across 50 drop ship orders in a month, the manufacturer bills the retailer 50 x $120 = $6,000.

Shopify's help center says dropshipping lets you sell products without handling inventory or shipping, with suppliers fulfilling orders directly to customers. It names three common models: product reselling, business extensions that partner with local retailers, and product creation that bundles existing products into new offerings.

When choosing suppliers, Shopify advises prioritizing suppliers that don't sell directly to the public and checking their order processing. It also suggests bundles built from a single supplier's products to avoid split shipments. Shopify's ecosystem supports integration with suppliers through third-party apps.

Uncap's home goods page describes drop ship from the supplier's side: a retailer sells it, you ship it, and their branding is on the packing slip. Drop ship orders draw from the same inventory position as wholesale and consumer demand, with retailer-branded documentation applied at fulfillment, because running drop ship on a separate system means the available quantity is inferred rather than known.

• Order fulfillment
• Packing slip
• 3PL
• Wholesale ecommerce
• Distributor
• Case pack

• CDTFA: Regulation 1706, Drop Shipments
• Shopify Help Center: Dropshipping