While drop shipping makes sales tax somewhat complex, it can be navigated with a little know-how and planning ahead.
Drop shipping provides several major benefits to sellers. With drop shipping, your customers can order your products and you can have it shipped from a third party, which is typically the supplier or shipper. This gives a seller more space for inventory, providing them with more flexibility to grow their business. 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’s what you need to know:
Understand How Nexus Applies to Sellers
If a customer happens to live in a state where you have nexus, 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 you provide your supplier an in-state resale certificate and collect sales tax from the customer as you would if you weren’t using drop shipping.
Know How Nexus Applies to Your Supplier
If a 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 to know when you can — and cannot — pass a resale certificate or other exemption documentation to your drop shipper.
Recognize the Nuances Around Drop Shipper Nexus
As if this wasn’t complicated enough, some states make things even more complex by giving your business nexus if your drop shipping facility is located there. This is especially likely if you, as a seller, hold title to the inventory when located in the drop shipper’s warehouse.
Keep Track of State Variations
In addition to states varying on whether or not they require a retailer to pay tax to their drop shipper, many vary on the details. Some states assign sales tax based on the wholesale price, while others go by the retail price. California applies a rule which permits a drop shipper to apply a deemed markup of 10 percent to their wholesale price in determining how much tax they should charge. As a seller, it’s crucial to look into these individual state requirements. Learn your state’s rules — check out this 50-state rule guide.
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 any other tricky sales tax issues. We cover businesses in all 50 states.
Stay on top of the sales tax challenges your business faces with Taxify by Sovos.