In a traditional drop-shipping transaction, two separate sales occur simultaneously at the point the goods are delivered to a customer.
The first sale to occur is between the vendor and the drop shipping company. This sale is most likely a sale for resale from the vendor’s perspective. The vendor is billing the drop-shipper for the purchase price of the items that were then delivered to the customer.
Upon delivery, the second sale occurs. That sale is between the drop-shipper and the customer. This sale is documented by the sales proceeds the drop-shipper receives from the customer for the goods which were ultimately delivered.
Assuming that the customer is the end-user of the products sold, this second sale is a retail sale and is taxable as dictated by the laws of the state where the customer is located.