Drop Shipping and Sales Tax: A Simple Guide Bench Accounting

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 https://adprun.net/what-does-my-accountant-need-to-file-business/ vendor to fulfill a customer order, but the rise in online sales has opened the door to more drop shipment relationships across industries. Forty-five U.S. states charge a sales tax, and all of their sales tax rates are different. Before 2018, you only had to pay sales tax in the state you resided in, but that unfortunately isn’t the case anymore.

However, Customer owes use tax to Connecticut on its full purchase price unless Customer is purchasing the goods for resale in the regular course of business or is tax exempt under Conn. Such person shall include the retail selling price of the property in such person’s gross receipts. Resale exemption certificate procedures are individual to each state. Many states will accept an out-of-state resale certificate, multijurisdictional form or alternate documentation in a drop-shipping situation.

Do I Need to Pay a Dropshipping Income Tax?

While each state has their own sales tax rules on drop shipping, there are two critical rules that are broadly applicable for manufacturers, distributors, and retailers. This means sales taxes are imposed on the final consumer of a taxable product Similarities & Differences Between Accounting & Bookkeeping or service. Sellers merely collect tax from their customers and remit the funds to the states. Next, sellers are only required to collect tax when selling to final consumers that are located in states where the seller has sales tax nexus.

• If you’re using Shopify for your dropshipping store, then this for you!
• The True Retailer would then pass on the state certificate to their Drop Shipper.
• The VAT tax rate isn’t the same throughout the EU but varies from country to country, and it can go from 17 to 27% at the very maximum.
• However, you might be required to get sales tax permits so that you have resale certificates on file with your supplier.
• Income tax rates vary in different regions, so it’s advisable to consult with an accountant to ensure proper compliance with local regulations.
• Nexus is a legal term for when you have a physical presence big enough in a state that you are required to collect and pay sales tax.

Instead, I’d like to leave you with a free gift I think you’ll love. The most common answer is that it is in the state where nexus exists. The situation becomes more complicated by the location of the parties involved.

Scenario 1: Ron Retailer collects the sale tax from Bobby Buyer

As with any sales tax situation, the first step is knowing where you have nexus, or a relationship with a certain jurisdiction that requires you to collect sales taxes. In general, if you have nexus in a state, you will be responsible for collecting the right rate of sales tax for that state on any sales to customers within that state. That applies whether you are using drop shipping or delivering in some other way. Sales made to the United States government are not subject to tax. As such, the sale by drop shipment of tangible personal property to the United States government is exempt from tax. Supporting documentation for this transaction includes a copy of the purchase order from the United States government or other documents demonstrating direct payment by the United States government to the true retailer.

Our first advice when it comes to dropshipping taxes in the USA is to check where you have nexus. Dropshipping affects your personal taxes only in regards to your income taxes. The thing is, Shopify will collect sales tax for you, but you must configure your store to do so. Thankfully, Shopify has easy steps for enabling all of EU VAT and all of US sales tax, so you can knock out 28 countries and 50 states with one setting. Sales tax is a form of consumption tax, applied to the purchase of goods and services. The end customer pays the tax, because they are who’s actually consuming the end product.

Taxes & rates

Alex Oxford, CMI, is the founder of TaxValet and has over a decade of sales tax expertise. Alex specializes in nexus, filings, audits, research, and product taxability for e-commerce and software businesses. He holds the highest sales tax designation possible within the United States, the CMI, granted by the Institute of Professionals in Taxation. Alex is a recognized author and speaker on sales tax-related topics and entrepreneurship.

• This tells them that they don’t need to charge you sales tax, which is good news for your wallet.
• To obtain a tax exemption certificate, we must contact our suppliers and prepare the necessary documents.
• This generally means the True Retailer cannot collect sales tax because they are not registered in the Customer’s state.
• Because you don’t have a resale certificate and get one in these 10 states, you must be registered first.
• Please note that this list is not exhaustive and should only be used as a starting point.
• If you’re the seller, you’re generally required to collect sales tax only if you have nexus with the customer’s state.

All you need to do is to send us your product list, and we’ll do the rest for you—product sourcing, purchasing from the factory, quality check, custom packaging & inserts, and order fulfillment. Each state has different tax rates, so you’ll have to check this individually for each state where you have a nexus. We want to point out that tax rules and tax laws aren’t fixed, and they have the tendency to change often.