Demystifying Drop Shipping Sales Tax: Process, Exemption and more!

Picture of Gary Jain
Gary Jain

Founder, Ledger Labs

Drop Shipping Sales Tax

Table of Contents

Are you having confusion regarding the drop shipping sales tax requirements? If yes, reading on will help you get clarity. On how you should deal with the taxation aspect of drop shipping as a retailer. This article lets you explore everything you need to know about drop shipped merchandise sales tax collection.

Discussing trade and commerce is not just about the product bought or sold or the revenue generated. But also about the liabilities involved. One such financial requirement of your business is knowing and obeying the sales tax rules. In drop shipping, sales tax becomes a crucial affair. Which the parties involved in the transaction must be well aware of. Drop shipping sales tax is applicable only when. The point of sale or the recipient’s address is in the state falling under the sales tax nexus.

What Is Drop Shipping?

Before understanding drop shipping tax requirements, you must know what exactly drop shipping is. Drop shipping is a process where the seller accepts an order from the buyer. And passes it on to a third-party provider. This third-party supplier could be a wholesaler or manufacturer. Who is responsible to deliver the ordered products directly to the customers.

Do Retailers Have To Collect Drop Shipping Sales Tax?

Yes, a retailer is subject to collecting sales tax on the drop shipment.

In the United States, the sales tax on drop shipping is imposed on the final customer, who places the order. Thus, if the customers reside in a state that falls under the sales tax nexus. They are billed accordingly with the rate, inclusive of sales tax.

A nexus is define per the state’s specifications with respect to the physical presence of the retailers. Or their representatives in the state, their advertising campaigns in that state, etc. When you have nexus, it becomes mandatory for you to register with the state and collect sales tax to remit it to the tax authorities of the place. Drop shippers, however, are free to have their own nexus to facilitate sales taxes.

How Does Drop Shipping Sales Tax Process Work?

The retailers pay for the wholesale price, which does not include sales tax figures from the manufacturer or suppliers. However, when the former bills customers, they add the sales tax charges to it as the consumers are the final recipients.

Though retailers are liable to collect tax from customers, the latter are subject to taxation only if they belong to the state that has nexus. For example, customer A from Texas and customer B from Louisiana placed an order for the same item with the same seller.

The seller forwards the order to be fulfilled by a third-party supplier, who then bills the former for the products per the price applicable. The seller, on the other hand, prepared the bill for both customers. For customer A, it adds the drop shipping sales tax amount, while for customer B, it only charges the exact product price. This is because Texas has the nexus and Louisiana does not.

How To Avoid?

Retailers may not want their customers to pay more as it might affect their sales figures. Thus, they plan to avoid the drop in shipping tax requirements. Given this need of the drop shippers, there is a provision for applying for resale certificates in the states that make sales tax applicable to the final customers.

Obtaining these certificates let retailers get rid of such taxation requirements and they can bill customers equally for the products sold. You can provide this certificate to suppliers and free yourself from the obligations.

Moreover, while some states easily provide this certificate to retailers, a few require the latter to qualify for the same. There are states that have home state retail certificates; whereas some states accept the registration number of the home state certificate itself. Similarly, some states accept multi-state resale certification, while others are fine with accepting an affidavit of no nexus.

The type of resale certification that works for you will depend on how you want to go about the drop shipping sales tax exemption.

Final Words

Going through the above details will help you understand if you, as a retailer, are subject to collecting sales tax on drop shipped merchandise. If you have been confused or still have questions, there are professionals as Ecommerce Accounting Services who can assist you in getting your queries resolved. Feel free to connect with them to get better clarity. Once you know the nitty-gritty of drop shipping tax requirements and exemption rules, you are all set to proceed.

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