How to manage sales tax when drop shipping

As a dropshipper, you’ll likely need to file both annually and quarterly. This means you have to pay the IRS several times a year instead of a lump sum all at once. With income tax payments, the federal or state government taxes you on the income your business earned. It takes a percentage of your income based on how much you made, which determines the percentage of taxes you pay.

• However, states have different standards of what documentation they accept.
• For this reason, suppliers frequently ask their retailers to provide them with resale certificate documentation that is valid in all of the states where they have sales tax nexus.
• Drop shipping can be a boon for online sellers, especially small businesses that don’t have the funds or space to keep inventory in stock.
• If your business is located in the EU…Then you must charge VAT on each EU sale.
• If the sale between the remote reseller and the Alabama customer is considered taxable, the remote reseller is responsible for collecting and remitting taxes to Alabama.
• Keep informed on the issue of drop shipping and ensure that you are in compliance with the laws of every jurisdiction to which you are availing yourself.
• If you’re a service provider with questions about the taxability of your transactions, refer to the Services Enterprises regulation, 830 CMR 64H.1.1, or contact our Rulings and Regulations Bureau at

For the best customer experience and a consistent sales tax process across all EU member states, follow the rules for distance selling in the EU. In general, if you have nexus with a state, you’re responsible for collecting and remitting applicable sales tax on sales to customers within that state. That’s true whether you use a drop shipper or deliver some other way. Dropshippers are supposed to collect sales tax anywhere they have sales tax nexus. Sales tax nexus is a complex topic, but in general, you need a sales tax permit anywhere you have a physical presence or meet certain economic nexus thresholds.

What is a drop shipment?

When a state revenue agency becomes aware of a customer’s untaxed purchase, it bills the customer for the use tax, penalty, and interest. Use tax is also due when the
purchaser pays sales tax, but the item is brought into a state with a higher rate. For example, if you charge sales tax at Florida’s rate of 6%, but the customer lives in
a state with a higher rate, that state can bill the customer for the difference. For inventory being delivered by drop shipment the place most closely connected to the taxpayer’s use of the inventory is the place most connected to the taxpayer’s economic benefit – the point of destination. Thus, it is appropriate that such inventory is included in the numerator of the taxpayer’s property factor based on the destination state. Therefore, inventory in transit to a Minnesota destination is inventory used in Minnesota by the taxpayer in carrying on its business activities and is included in the numerator of the taxpayer’s Minnesota property factor.

For motor vehicle and trailer sales, however, the buyer pays the sales tax directly to Massachusetts. Visit Motor Vehicle Sales and Use Tax for more detailed information. While not perfect, in the end, these solutions allow sellers to properly push sales tax obligations to consumers. Shopify automatically collects the right amount of sales tax on an order.

Drop Shipments

If buying multiple items, any sales tax is charged only on individual items over $175, no matter what the total bill is. The Department has published several guides, which provide more specific information detailing the sales tax compliance requirements for certain industries and types of contractors. Although sales to exempt organizations are exempt from tax, retail sales made by exempt organizations are subject to sales tax, unless an exemption applies. The statement must be signed under the pains and penalties of perjury.

People who aren’t registered to collect sales/use tax in Massachusetts, and who make an occasional out-of-state purchase for business or personal use, don’t need to register. Instead, they must pay their use taxes by filing either a Business Use Tax Return (Form ST-10) or an Individual Use Tax Return (Form ST-11). During the permitting process, the state will tell you how to pay taxes and how often you need to file. The good news is that most states have a simple online platform for sales tax, so it’s as easy as logging in and paying according to the state’s schedule. If Furniture Four has nexus with Washington, Furniture Four owes retailing B&O tax and is required to collect and submit retail sales tax from the customer in Washington.

Get Shopify to collect sales tax for you

Another possible drop shipping configuration presents itself when the retailer and supplier are in the same state, while the customer is in another. In these scenarios, both the supplier and retailer must understand what the nexus creating activities are with the state to which they are shipping. If you are an EU VAT-registered business, and your supplier is also in the EU, then VAT on these B2B purchases is managed through the reverse-charge mechanism. If your business is located outside of the EU, but your supplier is inside the EU, then you probably don’t have to pay VAT.

In this situation, they could be responsible for collecting sales tax. Keep in mind that this depends on the state, and the vendor would need to verify this information. It’s important to ensure that both you and the vendor understand who is collecting sales tax – this will help you avoid double charging sales tax or not collecting any at all. It’s important to consider drop shipping when choosing sales tax software, if you currently participate in an drop-ship program or plan to in the future. We’ve listed some of the pitfalls a retailer can experience with drop shipping, but there are other steps that can protect businesses from tax liabilities when drop shipping. Bobby Buyer is located in a state where Ron Retailer has sales tax nexus.

Why should I register to collect sales tax for another state?

Today, you may need to pay sales tax in a state that you don’t live in. Of all of the taxes you’ll pay as a dropshipper, none are more complex than sales tax. But just because it’s complicated doesn’t mean it’s impossible to figure out. To understand whether you need to charge sales tax, you’ll need to determine if you have a nexus. That’s because all retailers — dropshippers included — have to pay sales tax in a state if they have what’s called a “nexus” in that state. Nexuses can get a little complicated, so we’ll dive into them later in this guide.

If a sales tax rate of less than 6.25% is paid to the other state, the Massachusetts use tax is the difference between the 2 states‘ sales tax rates. Tax-exempt organizations that sell tangible personal property or telecommunications services in the regular course of business are also considered vendors and required to collect sales/use tax. For example, a retailer based in South Carolina sells a baseball cap through its website to a customer located in Illinois. The South Carolina retailer purchases the baseball cap from a distributor located in Arkansas and instructs the distributor to ship the baseball cap directly to the customer located in Illinois.

for Tax-Exempt Items & Sales

Some states consider an in-state supplier to qualify as a nexus for that sale. California, New York, Texas, and Florida have particular clauses about this https://www.bookstime.com/ scenario. Drop shipping can be a boon for online sellers, especially small businesses that don’t have the funds or space to keep inventory in stock.

• “Nexus” refers to a connection between a company or a person and a taxing authority or a jurisdiction.
• The problem is further compounded because the Customer is still liable for self-assessing use tax as their bill does not show that tax has been paid.
• Suffice it to say, drop shipping is a source of chaos for the shipping and sales departments of many businesses.
• For additional information on sales to the United States government, please see publication 102, Sales to the United States Government.

Generally, the tax on the sale or use of telecommunications services is a tax on transmitting messages or information by various electronic means, but not on the sale or use of information itself. Another common solution is for states to allow Drop Shippers to accept out of state exemption certificates from True Retailers. This works well for True Retailers, but Drop Shippers can be reluctant to accept them because of increased audit risks. This increased risk could be mere perception, but the risks can be real because these complex transactions come with higher risks of record keeping errors and misinterpretation.

Is Sales Tax Fair?

You can only claim reimbursement for tax remitted on bad debts on an annual basis by filing a Claim for Bad Debt Reimbursement (Form ST-BDR). It must be filed by the due date, including extensions, of your federal income tax return for accounts determined to be worthless during the prior fiscal year. In other cases, where the Customer is a taxable final consumer, some states would allow a True Retailer to collect the tax from their Customers and remit the tax to their Drop Shippers, who will ultimately remit the tax to the state. When states allow this kind of pass-through treatment, True Retailers may collect sales tax in states where it does not register to do so. This is not common practice, and states have rules about how the collection of tax must be stated on the Customer’s bill. The first thing companies should look for is Streamlined Sales and Use Tax Agreement (SSUTA) member states.

Drop shipping is a great expansion option for new businesses that can bring in extra income, but it takes commitment, compromise and time to ensure finding a supplier that is a good fit and that it is worth the investment. Sales tax requirements will become more complicated but reliable accounting and e-commerce software can ensure proper compliance within every state. For more information on sales tax and maintaining your compliance, https://www.bookstime.com/articles/drop-shipping-sales-tax read our complete guide to sales tax. If you’re feeling stuck, TaxJar’s software can help you get your sales tax filed properly, all online. If you still have lingering questions, you can speak with a vetted sales tax expert who can help you navigate drop shipping and sales tax. But if Adam sells that synth to a buyer in Kenner, Louisiana, Adam isn’t required to collect sales tax because he doesn’t have sales tax nexus in Louisiana.