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Drop Shipping Sales Tax: What You must Really Know

Drop Shipping Sales Tax

When considering the sale of products via drop shipping, you probably know that taxes will be involved.

It is impossible to sell products on eBay or your website without paying some type of sales tax.

This includes those who make a living as an online retail entrepreneur by using drop shipping as their fulfillment method.

While it comes as no surprise that taxes need to be paid, the amount of tax due is what often disturbs your average drop shipper.

This article will take you through the ins and outs of drop shipping sales tax.

We will answer all of your questions about whether you must collect sales taxes on every shipment, where to report those transactions, and how much to remit.

What Is Drop Shipping Sales Tax

All sellers in the United States, whether retailers or drop shippers, are required to collect sales tax if they have sales tax nexus in the state where the goods will be sent.

For example, Jack runs an online store in LA, California, which implies he has a nexus in California and is therefore obligated to collect sales tax from California.

If a customer in Denton, Texas purchases anything from Jack, he is required to charge him with sales tax.

However, if Jack sells that product to a buyer in Kenner, Louisiana, he is not required to collect sales tax since he lacks sales tax nexus in the state.

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By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.

Unfortunately, When drop shipping is involved, things get more complicated.

When conducting eCommerce transactions, the point of sale is regarded as the buyer’s “ship to” address.

The buyer’s location is irrelevant; only the place he or she takes possession of the products after they’ve been delivered matters.

This implies that if your vendor has nexus in your state and you are the buyer, you may be responsible for paying sales tax.

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Are you lost? Let’s use an example to explain it

Alan have an online beauty store and sells a foundation makeup to Lana.

Alan doesn’t have the foundation makeup in his stock, so he purchases it from Nicky “Drop Shipper”, and has Nicky deliver the foundation to Lana.

In this case, Alan pays Nicky (his supplier) for the foundation makeup, and Lana pays Ron.

What is the best way to charge sales tax in this case? There are a few different possibilities.

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Case 1: Alan collects the sale tax from Lana

The state where Alan has sales tax nexus is Lana. In this situation, Lana must pay sales tax to Alan.

If Alan doesn’t have sales tax nexus in Lana’s ship-to state, then he isn’t required to collect sales tax from her.

Case 2: Nicky collects the sales tax from Alan

Nicky “the supplier”, on the other hand, may have sales tax nexus in Lana’s state.

Because Nicky is drop shipping the goods to Lana at her ship-to address, If Lana resides in a state where Nicky has nexus, she must charge sales tax from the Buyer, Alan.

Case 3: Alan provides Nicky with a Resale Certificate

In this case, Alan has given proof to Nicky that she does not have to collect sales tax from him, because he is also a retailer.

Nicky does not charge sales tax to Alan in this situation, even if Nicky has sales tax nexus in the state where Lana is located.

It’s also worth noting that someone is in charge of collecting sales tax, and both Nicky “The Drop Shipper” and Alan “The Retailer” may be required to do so.

Sounds simple right?

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What Is The Resale Certificate and How It relates With drop shipping

A resale certificate allows a store to purchase items for resale without having to pay drop shipping sales tax on them.

You may also show your resale certificate to your vendor in order for them to understand that you are not required to pay sales tax.

If Nicky “The Drop Shipper” receives a resale certificate from Alan “The Retailer,” she won’t have to collect sales tax from him, even if drop shipping on his behalf to a customer in one of the states where she has sales tax nexus.

There are 2 things you should be aware of when it comes to resale certificates:

1) Only when purchasing items for resale and with the right paperwork are resale certificates permitted by law.

Resale certificates are legal in every state of the United States, although they can only be used to acquire things that you intend to resell or use as a component part of an item for resale (like the previous example).

2) Not all vendors will accept resale certificates

Your vendor has the right to decline your resale certificate.

Because it is the vendor who would be held responsible for unpaid sales tax if a resale certificate turns out to be fraudulent, most vendors refuse them.

Vendors may also choose not to accept resale certificates since they don’t want to encourage resellers to purchase their goods. Target is a great example.

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If you’re Dealing with a drop shipper who is located outside of your State.

There’s a high possibility that you’ll utilize a drop shipper outside your state in today’s global selling context.

Keep in mind: 36 of the 50 states with a sales tax allow your vendor to take a resale certificate from any state.

In most cases, a resale certificate is equivalent to your sales tax permit.

In ten states, on the other hand, you must apply for a sales tax permit and collect sales tax from all purchasers in that state in order to reap the benefits of having a resale certificate.

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FAQ

When you drop ship, who should pay sales tax?

You are responsible for reporting and paying sales tax on the retail selling price if: The sale is on behalf of an out-of-state merchant that does not hold a seller’s permit or a Certificate of Registration-Use Tax.

How do you obtain a tax exemption from drop shipping?

A drop shipper have to obtain a certificate of exemption and provide documents that meet the requirements of the state in which the certificate will be utilized.

The Multistate Tax Commission has attempted to simplify this process in order to make it easier.

Do you require a sales tax ID for drop shipping?

The majority of drop shipping businesses do not have to have an EIN in order to operate since sole proprietorships are by far the most frequent drop shipping business model.

However, if your drop shipping business is a partnership, LLC, or corporation, you will need one.

Are drop shippers required to pay value Added Tax “VAT”?

The importer on record is the buyer for VAT purposes, so if you’re drop shipping and your client is the importer on file, the customer would be responsible for import VAT.

If you are importing because your company is listed as the importer on record, the buyer would be the importer on record.

Is there a connection between drop shipping and nexus?

Nexus might be established via drop shipping. If sellers or shippers reach economic rather than physical nexus thresholds into a ship-to state, they have nexus and must register with the state.

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