Guide to Dropshipping and Sales Tax: Who collects, who pays?

Retailers need to register for the necessary sales tax permits, understand location-based sales tax rates, and maintain accurate and compliant documentation. Technology solutions, such as automated tax calculation software, can play a significant role in simplifying sales tax management for drop shippers. A resale certificate allows the retailer to purchase goods for resale without paying sales tax.

Sales tax nexus

Dropshipping is an e-Commerce technique that allows online entrepreneurs to sell products from their business, without ever owning or storing the product themselves. The same holds true for any qualified purchases by tax-exempt groups. A valid certificate is required to verify the purchaser’s status, and maintained in case there’s an audit.

Resale Certificates

If you’ve ever done this in the past, or were thinking about pulling off this type of transaction, this is called a drop shipment. While it’s definitely not the most common way of conducting an eCommerce business, drop shipping can be part of a very lucrative business model. TaxJar offers one platform to manage every aspect of sales tax compliance from calculations to reporting to filing. Try our sales tax compliance platform for 30 days, completely free with no obligation. The best way to manage dropshipping taxes in Shopify is to use an all-in-one tax plugin.

Drop shipping explained: What it is and why businesses use it

If you’re a sole proprietor, you likely need to file quarterly, but you can check the IRS’s requirements to see if that’s necessary. If you want to get into retail eCommerce without the hassle of managing inventory, dropshipping is the way to go. Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice.

How to comply with dropshipping tax regulations

• As a dropshipper, you’ll likely need to file both annually and quarterly.
• Of the two questions, the issue of nexus is vital to determining the responsibility each party has for sales tax in the destination state.
• Keep in mind that this exemption only applies to 36 U.S. states, so this won’t exempt you from sales tax everywhere, but it can certainly lighten the load.
• Vendors may also not accept resale certificates because they don’t want to encourage resellers to buy their products.
• Thankfully, most of the states will accept the “home state” certificate or the “home state” number on destination state’s exemption certificate.
• Consult with a tax advisor to ensure you’re compliant with federal income tax, state income tax, and sales tax.

When you’re a Pro, you’re able to pick up tax filing, consultation, and bookkeeping jobs on our platform while maintaining your flexibility. Taxes are incredibly complex, so we may not have been able to answer your question in the article. Get $30 off a tax consultation with a licensed CPA or EA, and we’ll be sure to provide you with a robust, bespoke answer to whatever tax problems you may have. You can connect with a licensed CPA or EA who can file your business tax returns. Having a comprehensive record-keeping system allows you to efficiently deal with tax authorities and auditors, avoiding surprises or lapses in compliance.

• So if the Retailer does not have sales tax nexus in the state where the product is purchased, the Supplier may be on the hook to collect and pay sales tax.
• For drop shipping operations to maximize efficiency and profitability, fundamental changes must be made to traditional trading partner relationships as well as B2B communication technologies.
• If your customer is a wholesaler and your company does not have nexus in California, then your customer can provide your vendor with a resale certificate directly.
• A resale certificate allows the retailer to purchase goods for resale without paying sales tax.
• If you’re feeling stuck, TaxJar’s software can help you get your sales tax filed properly, all online.
• Instead, they should realize that the particular geographic and financial circumstances of each trading partner in the drop shipping equation influences the tax liabilities of everyone else — including customers.

• When it comes to drop shipping and sales tax, understanding location-based tax rates is crucial.
• That’s because all retailers — dropshippers included — have to pay sales tax in a state if they have what’s called a “nexus” in that state.
• You should consult your own legal, tax or accounting advisors before engaging in any transaction.
• When you make your purchase from the supplier, you need to provide them your complete exemption certificate.
• Book a free call with one of our sales tax experts to find bespoke solutions for your business, optimize your tax costs, and reach millions of new potential customers.

Determining whether you owe sales tax is always challenging, because you have to track where your business has nexus. However, with drop shipping, it gets even more complicated, because you not only have to worry about where you have nexus, but where your vendor has nexus as well. This e-commerce model has long been a popular way to utilize a third-party vendor to fulfill a customer order, but the rise in online sales has opened the door to more drop shipment relationships across industries. It is essential to be familiar with the specific requirements of each state in order to correctly issue and utilize resale certificates in a drop shipping transaction. However, things start to get more complicated when drop shipping is involved.It’s important to note that in ecommerce transactions the “point of sale” is considered to be the buyer’s “ship to” address.

Master Dropshipping Tax Compliance and Learn How Sales Taxes Work in Dropshipping Business

Here’s an overview of the four types of taxes you might have to pay as a dropshipper. At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the who pays sales tax on drop shipments hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.

Featured products

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. The retailer should be able to purchase items it sells exempt from sales tax under the resale exemption. The complications lay in understanding https://www.bookstime.com/ how the retailer claims a resale exemption for shipments to a state where it isn’t registered to collect sales tax. And when it doesn’t qualify for an exemption, which price – wholesale or retail – should be taxed? In other words, what constitutes the tax base to which sales tax applies?

How to Legally Reduce Your Income Tax as a Dropshipper

If you still have lingering questions, you can speak with a vetted sales tax expert who can help you navigate drop shipping and sales tax. It helps to remember that someone is responsible for collecting sales tax, and in some cases both Debbie Drop Shipper and Ron Retailer will be responsible for collecting sales tax. 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. If you’re a for-profit business, the U.S. government requires you to pay taxes. Dropshipping might be an online business, but you’re earning an income from it, so Uncle Sam wants his cut. Ensure you file any required sales tax returns and make income tax payments to the IRS and relevant state authorities to fulfill your tax liabilities and avoid penalties.