The e-commerce business industry is constantly evolving in line with the digital world. As a business owner, it is essential to understand the various taxes and regulations so you don’t get caught out unnecessarily and risk your business. Drop shipping in particular adds an extra layer of difficulty for online businesses to navigate. For those seeking a more efficient way to manage your stock, drop shipping can be the perfect solution. In this guide, we’ll go over what drop shipping is, what sales tax is, and how they work together to give you a better idea of how to organise your business model.
What Is Drop Shipping?
Drop shipping is an order-fulfilment model which allows the seller to purchase inventory from a wholesaler or manufacturer whenever they receive a sale. The third-party wholesaler or manufacturer will be the one to stock all products and stock, making it easier for you as the seller to manage your inventory hassle-free. When it comes to drop shipping, the seller is essentially a middleman between the manufacturer and the customer. One of the best things associated with a drop shipping model is that the supplier will be responsible for order fulfilment, shipping and inventory stock, removing any stress from the seller.
What Is Sales Tax?
Sales tax is a type of consumption tax imposed by the local government or state on the sale of the purchase of goods or services. It is often the responsibility of a business to collect sales tax, but it is always the end customer who pays the tax as they are the ones who consume the end product, hence the name consumption tax. With drop shipping, the question of who collects the consumption tax from the customer often arises.
Drop Shipping Sales Tax Explained
In the US you typically do not need to pay sales tax on the orders made from your suppliers due to a sales tax exemption. This applies to purchases made for resale so it’s a great thing for drop ship sellers to take advantage of. However, in order to qualify for this exemption, you will need an official exemption certificate.
Sales Tax Exemption Certificate
To obtain a sales tax exemption certificate, also referred to as a resale certificate, it is best to check the rules of your state as they can vary across the US. Once an exemption certificate has been provided, you will need to show your supplier who then will not charge you sales tax. Some states may only accept in-state-issued certificates while others have multi-state certificates instead.
- Streamlined Sales & Use Tax Agreement (SSUTA): For those who are registered for tax with the SSUTA, the Streamlined exemption certificate will be accepted in every member state.
- Multistate Tax Commission: This is a general sales tax exemption certificate which is currently accepted by 38 US states.
Do You Charge Sales Tax For Customers?
When it comes to charging sales tax for your customers, this can again vary but there are clearer guidelines. If you have a sales tax nexus in a state then you must register for sales there. You must then collect and remit sales tax in all states where you’re registered. Yet with drop shipping, some states will tax the full retail price whereas others may only require tax on the wholesale price so you’ll need to check which applies to your state.
For those who do not have a nexus in a state, it usually means that you’ll be automatically exempt from charging and remitting sales tax. Though it is worth being aware that if the drop shipper who delivers the order is located in the same state as the customer, you might end up needing to pay sales tax. Some US states will consider an in-state supplier to be eligible as a nexus for the sale. For example, Florida, Texas, California, and New York all have clauses around this scenario.
Therefore, it is best to always check the tax policy of your state and the state you are sending an order to ensure you’re staying within the rules.