Last is the customer who purchases the product online and is likely unaware of everything that is going on behind the scenes. 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. In a third configuration of drop shipping, the customer, supplier and retailer are all in different states. Typically, this configuration would be considered an interstate commerce transaction and thus, would not be subject to tax. 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.

Some states will accept resale certificates from other states or they will accept multistate resale certificates. Other states like California, however, are more particular and require resale certificates for each individual transaction. Some states allow batch transactions while other states allow only individual transactions and also require that the seller certify that each transaction is being done for resale. Even if the retailer is located in Florida and the product is originating, being shipped and going to a customer in California, that product would be subject to California state taxes. Another configuration of drop shipping that businesses need to be aware of are those in which the supplier and customer are located in the same state while the retailer is in a different state. For example, a retailer, who is located in Florida and is purchasing from a supplier in California, ships the product to a customer in California.

Tax and Fee Guide

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. This creates a lot of friction between suppliers and their customers because the retailers do not understand the tax implications of what they are doing when they engage in drop shipping transactions. The problem that most suppliers encounter is that the retailer or customer insists that they do not have to pay tax in California because they have a reseller Outsourcing Bookkeeping: A Cost-Saving Opportunity certificate for another state. In this scenario, the supplier may take the other state’s resale certificate believing that it actually proves that the product will be tax exempt because the retailer is purchasing something for resale. Drop shipping has always been tricky for sales tax precisely because both the seller and the supplier (aka, drop shipper) can have nexus and sales tax obligations — or not. And the tax complexity of drop shipping has only increased since Wayfair.

Without such a high level of integration and cooperation between retailers and suppliers, drop shippers are opening themselves up to tension, confusion, mistakes, double taxation, and hefty penalties. If Furniture Four has nexus with Washington, Furniture Four is making an interstate retail sale to its customer. They would report the sale under both the retailing B&O and the retail sales tax classifications, with a deduction for interstate and foreign sales. Furniture Four must document the exempt nature of the sale by keeping records that demonstrate Chair Maker was instructed to deliver the goods directly to its customer outside of Washington. Each state in the US manages their own sales tax e.g. tax rates and (to some extent) their own tax rules. So, instead of the federal government imposing tax, the state itself carries this responsibility in its own hands.

Where Should Dropshippers Get Sales Tax Permits?

Before sharing sensitive information, make sure you’re on an official government site. Customer is liable for payment of the remainder of the tax directly to the State of Connecticut as a use tax. Hopefully, this post helped to break down your tax https://adprun.net/accounting-payroll-services/ obligations in a simpler, easy-to-understand way. You will need to know which states each of your vendors want a certificate for. Keep in mind that, even if you made $0 in sales in a given state, you still have to file tax returns claiming that.

• In both cases, the end-consumer always covers the costs, and these costs ultimately end up in the state or country’s budget.
• Physical nexus is created when you have real property in a state, like an office or brick-and-mortar store.
• Certain countries, such as the UK, can have a minimum threshold (at the moment 1,000 pounds) up to which you aren’t obliged to pay income taxes.
• Drop shipping can be a smart option for small sellers, but it can also add new layers of sales tax complexity.
• You must look to the state where the product is delivered to the consumer (your customer), called the “ship to” state.