The platform covers some parts of compliance for you, such as calculating and collecting the sales tax, but other essential parts of compliance are missing. The allure of the dropshipping model is that entrepreneurs can start an online business without investing much money up front (e.g. buying all their inventory) who pays sales tax on drop shipments and without a ton of overhead costs (e.g. renting storage space). Bear in mind that state policies can change; Tennessee recently began accepting exemption certificates issued by other states where previously it did not. But as with all things sales tax, there are different liability scenarios.

Simply put, drop shipping is a fulfillment process in which sellers send orders to customers directly from a manufacturer or distributor, rather than keeping stock on hand. “Nexus” refers to a connection between a company or a person and a taxing authority or a jurisdiction. Supreme Court determined in South Dakota v. Wayfair, Inc. et al that an out-of-state seller could establish “nexus” through economic activity alone and that physical presence is not required to create nexus.

Sales Tax 101: I’m in a Drop Shipping Relationship. Now What?

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. Target is a well-known example of a retailer that discourages the use of resale certificates. In the U.S., all sellers (whether retailers or drop shippers) are required to collect sales tax if they have sales tax nexus in the state to which the item ships. It gets even more complicated as some states have stricter rules than others. While this does not include every state, tax expert Diane Yetter claims there are “approximately 11 states” that require sellers who would like a resale certificate to be registered in that state.

• When discussing drop shipping and sales tax, the concept of nexus is crucial.
• When a business has nexus in a state, they are required to collect sales tax from customers in that state, which can depend on various factors like the location of the seller, the buyer, and the third-party drop shipper.
• Sales tax is a consumption tax imposed by government authorities on the sale of goods and services, and it is the responsibility of the retailer to collect the appropriate sales tax and remit it to the appropriate tax jurisdiction.
• (article has been removed) Those states require the drop shipper to collect sales tax from the retailer.
• As a drop shipper, it is advisable to inform your customers about potential import charges and encourage them to research the applicable regulations in their country.
• In this scenario, Debbie does not collect sales tax from Ron, even if Debbie has sales tax nexus in the state where Bobby Buyer is located.

Drop shipments may feel confusing or frustrating, but they can become second nature for you when you know the rules. Learn what they are, who plays a role, and some expert tips from Sales Tax Institute founder Diane Yetter. With a little guidance, you can handle drop shipment transactions correctly and avoid negative financial implications.

Sales Tax Exemption Certificates

Third-party drop shipments are becoming one of the most common ways that eCommerce companies use to fulfill their customer’s orders. Chances are, your suppliers are shipping products into the U.S. from other countries. The U.S. government taxes imported goods brought in from overseas, so you’ll have to pay customs or duty taxes before officials will release the goods. While sales tax might be the first thing that comes to mind, dropshippers actually deal with a variety of different taxes. As a dropshipper, you can start a retail business with very little capital investment. As long as you have A-plus suppliers, you can focus on marketing and making sales while other parties handle storage and shipping.

You don’t want to make a misstep here, so you should work with a tax professional to help you legally pay fewer taxes. If you want to save even more time, Spark Shipping integrates with Shopify. Let Shopify automate your sales tax while Spark Shipping handles just about everything else.

Drop Shipments – Who holds the sales & use tax responsibility?

For any items not available on hand, the retailer places an order with the supplier. From the customer’s perspective, the experience is essentially the same as the purchase outlined above. Customers browse a catalog or site, choose their goods, and pay the seller, including all applicable taxes. Learn about the basics of drop shipping, different drop shipping scenarios, and how Avalara can help.