Dropshipping and Sales Tax: who collects, who pays?

drop shipping sales tax

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. 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. (article has been removed) Those states require the drop shipper to collect sales tax from the retailer. Nevertheless, if the goods sold are subject to sales tax in the state, the supplier must validate the exempt transaction by collecting a resale or exemption certificate from the seller.

Here are the instructions for enabling sales tax in the United States, Canada, and the rest of the world. Telecommunications services such as telephone services, cellular services, paging services, and fax services that are not used to provide access to the internet are subject to tax. Connecticut sales or use tax applies to any transaction where title to the goods being sold transfers from the seller to the buyer in Connecticut.

Recent Challenges with Drop Shipping

This means that suppliers and retailers should share know-how, time, and data to ensure tax laws and regulations are being properly followed. Drop shipping can be a successful solution for sellers, but Accounting Services and Bookkeeping Services Outsourced Expertise it can also add new layers of sales tax complexity. One way for businesses to make the most out of drop shipping and other innovative solutions is sales tax automation software such as Avalara AvaTax.

Unfortunately, the type of documentation required varies by state and is sometimes difficult and costly to acquire. The State of Alabama does not issue sales tax licenses (resale certificates) to remote businesses (no business locations in Alabama). The transaction between the vendor/drop-shipper and reseller is one transaction, and the transaction between the reseller and the Alabama customer is a separate transaction. It is Alabama’s stance that the vendor/drop-shipper should accept the home-state issued resale certificate when the reseller is purchasing to resell to a customer located in Alabama (drop-shipped to an Alabama address). If the sale between the remote reseller and the Alabama customer is considered taxable, the remote reseller is responsible for collecting and remitting taxes to Alabama. Drop shipping rules prohibit a supplier from accepting a resale certificate from an unlicensed seller.

Inventory Considerations with Drop Shipping

The good news is that most states have a simple online platform for sales tax, so it’s as easy as logging in and paying according to the state’s schedule. 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 https://kelleysbookkeeping.com/cpa-accounting-taxation-bookkeeping-outsourcing/ will release the goods. 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. As the supplier, you may also be required to collect and remit tax on a seller’s sales in states where you have nexus, but the seller does not.

drop shipping sales tax

Connecticut use tax also applies to any transaction where title to the goods transfers outside Connecticut, but the goods are intended to be used in, and are brought into, Connecticut. BUT, if you are a NEW dropshipper, then you do not need to worry about this until you start making a lot of money and making a lot of sales. As to what type of transactions are and are not considered non-taxable interstate commerce, many states (and likely all, in some capacity) provide examples on their respective state tax websites. If they ship using a common carrier such as USPS, FedEX or UPS, that would not normally be considered nexus creating activity. Rather, shipping through a common carrier would simply be considered an in-state transaction.

How Do You Calculate Sales Tax when Selling Online?

With drop shipping transactions, the supplier or the retailer can potentially avail themselves to the taxation of the states in which their customers are located. The risk of unintentional availment is high for retailers and especially for suppliers. For the most part, when a retailer buys a product from a supplier, that purchase is tax exempt because the product was bought for resale. So if the retailer does not have nexus in the state where the product is purchased, the supplier may be on the hook to collect and pay sales tax. Let’s say you have nexus in Virginia because that is your home state and the location of your office.

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