Sales Tax and Drop Shipping — What Sellers Need to Know
Drop shipping provides benefits to sellers. With drop shipping, your customers order your product and you then have it shipped from a third party, which is typically the supplier or shipper. This provides a seller more flexibility in their business as a result of increased space for inventory. This flexibility allows firms to explore new lines of business, offer a broader product offering, save money on storage and save time.
While drop shipping is often a useful way to handle your business, it is not without complications. In particular, drop shipping can make sales tax a bit tricky. Luckily, there are steps you can take to navigate the potential complications. Here is what you need to know when it comes to sales tax and drop shipping:
Understand How Nexus Applies to Sellers
If your customer happens to live in a state where you have nexus, then you are responsible for collecting and remitting sales tax on transactions, even though you are using drop shipping instead of more conventional retail channels.
In the most straightforward scenario, your business, customer and drop shipping facility are all in the same state and therefore you collect sales tax from the customer in the same manner you would if you weren’t using drop shipping.
Know How Nexus Applies to Your Supplier
If your customer is located in a state where you do not have nexus, but your drop shipper or supplier does, they may be responsible for collecting and remitting sales tax. This requirement varies by state, so it’s important that your drop shipper finds out the sales tax requirement for the specific state and follows it.
Recognize the Nuances Around Drop Shipper Nexus
As if this wasn’t complicated enough, some states make things even more complex by automatically giving your business nexus if your drop shipping facility is located in their state.
This means that even though you and your business are not located in a state, the mere fact that you are using a drop shipper there gives you nexus, making you responsible for that state’s sales tax. States where this is the case include California, New York, Texas, and Florida.
Keep Track of State Variations
In addition to states varying on whether or not they assign nexus to drop shipping locations, even the states that do so vary on the details. Some states assign sales tax based on the wholesale price, while others go by the retail price. As a seller, it’s crucial to look into these individual state requirements. Learn the rules of your state — check out this 50-state rule guide.
File the Appropriate Documentation
It’s not enough to just know the rules — you must also file the correct paperwork for each state where you are collecting sales tax. Just like the rules themselves, the required documentation varies quite a bit by state. Possible required documents include resale certificates, exemption certificates, and home state registrations.
While drop shipping makes sales tax somewhat complex, it’s nothing that can’t be navigated with a little know-how and planning ahead. You can always contact us for help with this and any other tricky sales tax issues. We cover businesses in all 50 states.
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