Dropshipping is an ever-increasing business model that allows vendors to have large stock amounts readily available for their clientele, however, there are sales tax considerations that businesses should first take into consideration.

It’s important for retailers that use the dropshipping business method to know that there are tax implications for them and potentially the buyer, too. E-commerce drop-shippers need to navigate the difficult world of sales tax in the US and should consider multiple things, including the collection and remittance of sales tax and whether or they are required to register their business due to sales tax nexus. 

Are Dropshipping Retailers Required to Pay Sales Tax?

Sales tax in the US is complicated and so it is not surprising that sales tax for dropshipping is incredibly complex, too, which means that there is no clear answer. As each state in the US has different sales tax regulations, drop-shippers must do thorough research into their sales tax obligations. 

Are There Sales Tax-Free States for Dropshipping?

Yes, there are a handful of states that do not require the collection and remittance of sales tax in the US, such as Delaware, Montana, Oregon and New Hampshire. However, it is crucial to research each state where your customers are located to ensure that you do not have a nexus in a state, which would require you to collect and forward sales taxes to relevant taxation departments. 

How Does Sales Tax Nexus Work For Dropshipping?

As Sales Tax operates via the nexus system in the US, it’s key to know whether or not your company has a sales tax nexus connection in the state where each sale is made or delivered (where the customer is located). You will need to register in each individual state where a sales tax nexus is created and this means you must collect and remit sales tax in these states. 

Dropshipping and Sales Tax Exemption Certificates

Retailers that operate dropshipping and purchase from a wholesaler are usually exempt from paying sales tax, as the items are intended to be resold, however, be mindful that this is not always the case. This is permitted in scenarios where an official sales tax exemption certificate, otherwise known as a resale certificate, is present. The most common certificate, which is accepted by 38 states, is the Uniform Sales and Use Tax Resale Certificate.

Do Dropshipping Stores Need To Pay Income Tax?

Yes, alongside the chance of paying sales tax, drop-shippers will be required to pay income tax, which is the tax paid on the annual profit that the retailer makes. If there is no profit for that year, there is no income tax to be paid. If you reside in the US, this must be paid to the US government and possibly to the local state. It’s recommended to speak to a tax specialised to ensure you are aware of your tax obligations in the US.

What E-Commerce Platforms Assist with Sales Tax for Dropshipping Stores?

As dropshipping is not a new business model, many e-commerce platforms assist their users with collecting sales tax on dropshipping orders. For example, Shopify has adjusted its tools and now has options that allow the automation of sales tax amounts and categorization built into the platform. Furthermore, there is plenty of e-commerce sales tax software available that is user-friendly and designed to assist users to manage their sales tax appropriately. By applying these measures, your business will reduce the risk of being confronted with unexpected tax penalties.  

Dropshipping Tax Summary

In summary, drop-shippers are required to pay income tax annually on the business’s profits, as would any business owner. In regards to sales tax, there are sales tax exemption certificates available for businesses that buy to resell products, however, these are not excepted in every state. Furthermore, if there is a nexus created in the state where a drop-shippers client is based, the collection and remittance of sales tax will be required.