What You Need to Know about Sales Tax and Drop Shipping

Drop shipping sales tax

Exemption certificates (also known as resale certificates or permits) are another key factor to consider in your dropshipping tax structure. As a retailer, you can present an exemption certificate to your supplier that indicates they aren’t required to collect tax from you, even if they have a tax nexus in your state. More and more drop shipping suppliers are suddenly facing audits and hefty fines.

Drop shipping sales tax

Unfortunately, drop-shipments are extremely complex when it comes to sales tax. If you are running a company you must keep an eye out for drop shipping transactions because states are becoming increasingly more aggressive about enforcement on these fronts. The customer’s jurisdiction will not impose a tax for the retailer and supplier but a use tax requirement would likely be triggered for the customer in this situation. For now, you only need to collect and pay sales tax on orders made in states that you DO have nexus in (which for most people, will only apply to the state that they live in).

Collecting Sales Tax With Shopify

In this situation, Drop Shippers are often required to remit tax to the Customer’s location state because the Drop Shipper has nexus and the True Retailer does not. Charge taxes, collect taxes, pay taxes, sales taxes, VAT, income taxes, where’s the end? With so many terms surrounding the topic, it’s no wonder that many dropshippers want to give up from fear of getting in trouble with tax laws. Every state has its own tax laws and regulations related to drop shipping that are constantly changed and updated.

Even though the seller owns the transaction and the customer relationship, the seller doesn’t fulfill the order. Feel free to contact our expert support staff 24/7 by clicking here. If you fail to pay your taxes on time, you’ll incur a 0.5% fee of the unpaid taxes every month until paid, but it won’t exceed 25%. Failure to file and pay your taxes in the US can result in a 4.5 percent penalty per month on any unpaid taxes for up to five months.

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The US dropshipping taxes are different and somewhat more complicated to understand than in other countries, so be sure to familiarize yourself with your specific nation’s requirements. The first thing companies should look for is Streamlined Sales and Use Tax Agreement (SSUTA) member states. This is because many of these member states allow Drop Shippers to accept a specific multistate sales tax exemption certificate. Other states accept the Multi-state Tax Commission’s (MTC) multijurisdictional uniform sales and use tax exemption certificate. In general, use tax is the same as sales tax but applies when sellers do not collect sales tax. Purchasers are often required to self-assess use tax when purchasing taxable items from out of state sellers that are not required to collect sales tax in their state.

Types of Tax That Apply to a Dropshipping Business

Shopify will automatically collect tax on every transaction based on your business’s settings. It can even help you calculate whether you have a nexus in a particular state and help you calculate the right sales tax rate. During the permitting process, the state will tell you how to pay taxes and how often you need to file.

The risk of unintentional availment is high for retailers and especially for suppliers. For the most part, when a retailer buys a product from a supplier, that purchase is tax exempt because the product was bought for resale. So if Drop shipping sales tax the retailer does not have nexus in the state where the product is purchased, the supplier may be on the hook to collect and pay sales tax. One key factor for sales tax compliance with drop shipping is the exemption certificate.


Assuming that your 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 your customer is located. Of all of the taxes you’ll pay as a dropshipper, none are more complex than sales tax. But just because it’s complicated doesn’t mean it’s impossible to figure out. To understand whether you need to charge sales tax, you’ll need to determine if you have a nexus. You don’t play by the same rules as a brick-and-mortar retail store, and there are tax implications to sourcing products from a supplier and reselling them in the U.S. Resale exemption certificate procedures vary from state to state.

  • First of all, drop-shipping purchases are meant for resale, which is normally exempt from sales tax.
  • You can find our series of blog posts on nexus state-by-state on our website.
  • Other states accept the Multi-state Tax Commission’s (MTC) multijurisdictional uniform sales and use tax exemption certificate.
  • Suppliers grapple with the most risk when it comes to drop shipping transactions because they are shipping to people who may not be their customers.
  • In this situation, Drop Shippers are often required to remit tax to the Customer’s location state because the Drop Shipper has nexus and the True Retailer does not.

In turn, the supplier’s obligation could require you as the seller to either pay sales tax to the supplier or to come up with an exemption certificate so that you don’t have to pay tax. Otherwise, the manufacturer/supplier would be required to collect tax on its sale to the retailer even though it is really a sale for resale. Remember, exempt sales are only exempt if the right documentation is presented. Drop shipping rules prohibit a supplier from accepting a resale certificate from an unlicensed seller. For this reason, suppliers frequently ask their retailers to provide them with resale certificate documentation that is valid in all of the states where they have sales tax nexus.

Where Should Dropshippers Get Sales Tax Permits?

If you remain below the thresholds and never register for VAT, then you run the risk of unhappy customers. If your goods are being imported from outside the EU, then upon delivery, the customer might end up paying some surprise VAT and import duties. For the best customer experience and a consistent sales tax process across all EU member states, follow the rules for distance selling in the EU. Your vendor reserves the right not to accept your resale certificate. Mainly because it’s the vendor who is on the hook for unpaid sales tax should a resale certificate turn out to be fraudulent. Vendors may also not accept resale certificates because they don’t want to encourage resellers to buy their products.

Or you are researching how to dropship, but are you wondering what to do with taxes like the sales tax and VAT? In this awesome guest post from Quaderno, you learn everything that you need to know about the taxes for when you’re dropshipping. While not perfect, in the end, these solutions allow sellers to properly push sales tax obligations to consumers. Then, once you know the state/s where you have nexus (if any), check the sales tax rate in that state.

Drop shipping sales tax

However, that doesn’t mean you shouldn’t pay your taxes if you don’t get the form. As we mentioned before, every single income you make through Shopify payments or PayPal is subject to taxes. According to tax laws, income tax is paid in almost all countries worldwide on any profit you make throughout a calendar year.

Proven And Effective Dropshipping Methods

When states allow this kind of pass-through treatment, True Retailers may collect sales tax in states where it does not register to do so. This is not common practice, and states have rules about how the collection of tax must be stated on the Customer’s bill. Another common solution is for states to allow Drop Shippers to accept out of state exemption certificates from True Retailers. This works well for True Retailers, but Drop Shippers can be reluctant to accept them because of increased audit risks. This increased risk could be mere perception, but the risks can be real because these complex transactions come with higher risks of record keeping errors and misinterpretation.

With drop shipping, sellers can take orders from customers for an item and then turn around and order that item from a supplier, which then ships it to the customer. The seller doesn’t have to handle the physical item at all, the customer gets his or her order, and everyone’s happy. Dropshippers are supposed to collect sales tax anywhere they have sales tax nexus. Sales tax nexus is a complex topic, but in general, you need a sales tax permit anywhere you have a physical presence or meet certain economic nexus thresholds. You can find our series of blog posts on nexus state-by-state on our website. With drop shipping transactions, the supplier or the retailer can potentially avail themselves to the taxation of the states in which their customers are located.

While it can seem overwhelming, all these tax obligations become manageable with the guidance of an accountant. Dropshipping taxes also differ by method of collection and payment. If Chair Maker has nexus with Washington, Chair Maker is making an interstate sale to Furniture Four.

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For instance, dropshippers must pay an income tax to their local governments based on their income brackets. However, there are exceptions to that rule, as nine US states don’t have an income tax. While the dropshipping business model is easy enough to understand, many find the topic of taxes overwhelming. If Furniture Four has nexus with Washington, Furniture Four is making an interstate retail sale to its customer. They would report the sale under both the retailing B&O and the retail sales tax classifications, with a deduction for interstate and foreign sales.

  • The problem that most suppliers encounter is that the retailer or customer insists that they do not have to pay tax in California because they have a reseller certificate for another state.
  • For simplicity, these scenarios assume that each party to the drop shipment is located in a different state and that the goods are shipped from outside of the destination (i.e. end-customer’s) state.
  • Some states allow batch transactions while other states allow only individual transactions and also require that the seller certify that each transaction is being done for resale.
  • However, in California and other states that have stricter requirements for resale certificates, a seller must register with the state in order to obtain a valid exemption certificate from that state.
  • They receive their shipment, ideally within the specified delivery period.

We’ll discuss how dropshipping taxes work and whose responsibility it is to pay and collect them. Additionally, we’ll learn more in-depth about each tax and how to lessen their burden on our bottom line profits. The following three simplified scenarios — based on the nexus status of trading partners in the state in which the sale occurs — serve to highlight the complexity of the tax situation for drop shipping. I’ve written a lot about the fact that drop shipping isn’t just another distribution method. It’s a new way of doing business that has unique operational and logistical challenges.

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