If you’re considering starting a drop shipping-based business, or perhaps already have one, it is important to know whether or not you need to pay sales tax. Drop shipping has boomed in popularity over recent years due to the ease and convenience it offers for sellers. With drop shipping, a seller receives an order and then has to go and order the product(s) from the supplier who will ship it directly to the customer. As drop shipping involves numerous different parties which are often spread over two or three states, it can be tricky to work out sales tax compliance and who can benefit from an exemption. This guide will cover how sales tax and drop shipping work, and how to apply for a sales tax exemption certificate. 

How To Know If You Have Nexus With A State

In order to know whether you need to pay sales tax, you must first determine whether you have a sales tax nexus in a state. There are several ways to establish this with the two most common being through physical presence and economic activity. Physical nexus is established when you have a real property such as an office, inventory, or employees in the state.

 Whereas economic nexus is created when a business without a physical presence meets or exceeds a state’s economic nexus threshold. See the difference between California and Wyoming below to gauge an idea of the different states’ economic thresholds:

  • California: Requires a total combined sales of tangible personal property delivered into the state by the retailer in the current or previous year to reach $5,000.
  • Wyoming: Requires $100,000 or 200 transactions of annual gross sales of tangible personal property, services, and admissions in the current or previous year. 

Sales Tax & Drop Shipping

With an e-commerce drop shipping business, the seller is usually required to collect sales tax if you have a nexus with the customer’s state. Provided you do have a nexus, you will need to either charge your customer sales tax or collect a valid resale or exemption certificate from them.

When it comes to the supplier’s sale to you, the seller, there is usually an exempt wholesale transaction as reselling is involved. This is the case even when the supplier has nexus and an obligation for sales tax in the seller’s state. The supplier must therefore collect a valid resale or exemption certificate if this is the case. 

Sales Tax Exemption Certificate Explained

To obtain a sales tax exemption certificate, also known as a resale certificate, the process will vary from state to state. Currently, 38 states accept a multistate certificate which is a general sales tax exemption certificate. Other states may only accept an in-state-issued certificate.

Drop shipping rules forbid suppliers from accepting a resale certificate from an unlicensed seller. Without a valid sales tax exemption certificate, the drop shipper must charge sales tax to the seller. Though state tax policies often change. Tennessee, for example, recently started to accept exemption certificates from other states, having not accepted them previously. It is therefore worth researching the current policy of your state to make sure your processes are up-to-date and legitimate. 

Apply For A Sales Tax Exemption Certificate

To get a sales tax exemption certificate, you can usually submit your application online via the government website. You can alternatively complete a paper version of your application which continues to be accepted. The application should not take you long, and once you have received a sales tax exemption certificate, you’ll be able to show your supplier who will then not be able to charge you sales tax on your drop shipping business.