Your Ultimate Guide to Sales Taxes on Drop Shipping

Drop shipping has become a hot trend in ecommerce, letting sellers run their businesses without stocking any inventory. While this model cuts down on upfront costs and enables you to focus on sales and customer service, it does come with its own challenges—especially regarding sales taxes. 

Are you wondering how sales tax works in the world of drop shipping? This ultimate guide is here to help. We’ll break down the basics and give you the tools to handle your sales tax responsibilities like a pro.

 

What is Drop Shipping?

Drop shipping is an ecommerce model where an online store sells products to consumers without keeping them in stock. Instead, when a store sells a product, it purchases the item from a third-party vendor, who then ships it directly to the customer. In essence, the seller never sees or handles the product.

Imagine this: You’re the retailer, but instead of having a warehouse stacked with products, your role is more of an intermediary. When a customer orders on your website, you forward the details to a third-party supplier, and that supplier then handles packing and shipping the product directly to the customer’s doorstep. Pretty neat, huh?

This fantastic setup means you don’t have to deal with the nitty-gritty of inventory management or shipping logistics. It’s like being a curator for an art gallery; you select what goes on display and how to present it, while someone else handles the behind-the-scenes details.

 

The Three Point-of-Views of Drop Shipping

The Customer

From the customer’s viewpoint, it’s business as usual—just like any other online shopping experience. They scroll through the online catalog, pick out what they like, and pay the retailer, including any relevant taxes. Then, they simply wait for their package to arrive, hopefully within the estimated delivery time frame.

 

The Seller

When an order and payment come in from a customer, the seller springs into action. For any products not sitting in a warehouse—because we’re talking drop shipping here—the seller quickly places an order with their trusty supplier. Along with the payment, the seller shares the customer’s shipping details with the supplier, ensuring the package goes to the right destination.

 

The Supplier

Once the supplier gets the order and payment from the seller, it’s their turn to take action. They locate the ordered items within their inventory, neatly package them, and then ship them to the customer’s doorstep. It’s a streamlined process that cuts out the middleman for shipping, making the whole transaction as efficient as possible.

 

Who Should  Pay Sales Taxes in Drop Shipping?

  The question of who is responsible for collecting and remitting sales tax in a drop shipping scenario can be complex. Sales tax is regulated at the state level, and each state has its own rules. Generally, the seller (the retailer) should collect sales tax from the customer and then remit it to the appropriate tax jurisdiction.

However, in drop shipping, since the product goes directly from the supplier to the customer, three potential parties are involved: the customer, the seller, and the supplier.

1. If the seller (retailer) has a business presence (sales tax nexus) in the same state as the customer, then the seller is responsible for collecting and remitting sales tax.
2. If the seller (retailer) doesn’t have nexus in the customer’s state, but the supplier does have nexus, the supplier may be required to collect and remit sales tax in the state where the customer resides.
3. If neither the seller (retailer) nor the supplier has nexus in the customer’s state, generally, no sales tax needs to be collected and remitted.

Sales Tax Exemption Certificates in Drop Shipping

Sales tax exemption certificates can make the already complex world of drop shipping even trickier. Here’s the deal: when a retailer buys items for resale, they can often avoid paying sales tax by providing a resale certificate to their supplier. However, it’s important for both parties, the retailer and the supplier, to be well-versed in the rules governing these certificates in the states where they operate. Mishandling the documentation of a  tax-exempt sale may result in fines or other headaches. Therefore, it’s crucial to maintain accurate records to prevent potential issues down the road.

 

Preparing for Sales Tax Compliance

Here are some steps to help you prepare for sales tax compliance:

1. Identify Nexus: First, determine where you must pay sales tax and which states your business has a presence. This might include states where you have physical locations, employees, or even a high sales volume.
2. Register for Sales Tax Permits: Before collecting sales tax, you’ll need a permit from each state where you have nexus.
3. Calculate and Collect Sales Tax: Use automated tools or consult with tax professionals to ensure you charge the correct rate.
4. File and Remit Sales Tax: Depending on your sales volume, you’ll need to file and remit sales tax on a monthly, quarterly, semi-annually, or annual basis.
5. Document Exemption Certificates: If you’re using resale certificates, keep accurate records showing that you comply with the law.

 

Let TaxHero Guide You! 

Navigating sales tax while running a drop shipping business can be complex, but it doesn’t have to be a roadblock.  With TaxHero by your side, you’ll have a  clear roadmap and a hands-on guide to help you navigate your sales tax responsibilities. We handle everything for you, from figuring out which states to collect sales tax to filing your sales tax returns.

  Still scratching your head about sales tax rules? Why not schedule a call with our CEO? We’re committed to simplifying the confusing parts and walking you through each process. Don’t let the complexities of sales tax hold you back from your e-commerce dreams.