Short Summary: If you are a drop-shipper, you should get sales tax permits anywhere your business has sales tax nexus. You should also take into consideration any resale certificate documentation your suppliers may request.
Dropshipping is a popular business model that allows entrepreneurs to grow an e-commerce business without the need of buying and storing inventory. Unfortunately, drop-shipments are extremely complex when it comes to sales tax.
Our intent with this blog post is to untangle this mess and help give you clarity on where you should register for sales tax permits.
What Is Dropshipping and Why Is It so Complicated?
Dropshipping is complex because there are three different parties involved with the transaction.
First is the retailer who accepts orders online from customers and sends them to the manufacturer/wholesaler. Next is the manufacturer/wholesaler who receives orders from the retailer and ships the product directly to the customer and bills the retailer for their products. Last is the customer who purchases the product online and is likely unaware of everything that is going on behind the scenes.
If you are the retailer (dropshipper) in this scenario, you should consider:
(1) where you, the retailer, are supposed to collect sales tax; and
(2) where the manufacturer/wholesaler has sales tax nexus and needs appropriate resale documentation from you.
Where Are Dropshippers Supposed to Collect Sales Tax?
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. You can find our series of blog posts on nexus state-by-state on our website.
In general, you likely need a sales tax permit if you have any of the following:
- An office or place of business in the state
- A warehouse or inventory stored in the state
- Employees or independent contractors in the state
- Own real or personal property in the state
- Deliver merchandise in the state using your own vehicle
- Meet the state’s economic nexus threshold (typically $100,000 in sales per year or 200 transactions)
Please note that this list is not exhaustive and should only be used as a starting point. We recommend researching individual state statutes to determine if you have a sales tax collection responsibility there. Or, if you need help determining where you have sales tax nexus, you might benefit from our Sales Tax Starter Kit service.
Once you’ve determined that you have sales tax nexus in a state, you will need to register for a sales tax permit.
What If You Are Just Starting Your Business?
If you are just getting started and don’t have a physical presence in the U.S you might not have sales tax nexus or need sales tax permits. However, you might be required to get sales tax permits so that you have resale certificates on file with your supplier.
What If Your Supplier Is Requesting Resale Certificate Documentation?
The number one issue for dropshippers has nothing to do with where they have sales tax nexus, but rather where their suppliers have sales tax nexus.
Since your suppliers are billing you (the retailer) for the products they are shipping to the end-consumer, they need to charge you sales tax on each order unless they can prove to the state that the sales should have been tax-exempt because it was being resold by you to the end-consumer. This is done by providing the supplier with proper resale certificate documentation.
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. If you receive a letter asking you to provide resale certificates in dozens of states, don’t panic! There’s a workaround.
When your supplier asks you to provide resale certificate documentation for a list of states, this does not mean that you should go and get sales tax permits in each of those states. Why? Because many states allow you to use an out-of-state sales tax permit when completing resale certificate documentation.
For example, you can use your sales tax permit from California to furnish the proper resale certificate documentation to your supplier without having to register in every single state they are requesting resale documentation in.
You can see each state’s resale certificate forms by clicking here.
There is a catch, however. Some states won’t accept out-of-state resale certificates. You can read more about that on this blog post.
One thing to keep in mind is that if you end up getting a sales tax permit in order to provide proper resale certificate documentation to your vendor, you will also need to collect and remit sales tax in that state!
A Couple of Examples (Because This Stuff is Confusing)
Example 1: You have a sales tax permit in California and are dropshipping to a customer in Georgia. Your supplier does not have sales tax nexus in Georgia. You do not have sales tax nexus in Georgia. You do not need a permit in Georgia and do not need to collect or remit sales tax in Georgia.
Example 2: You have a sales tax permit in California and are dropshipping to a customer in Georgia. Your supplier does have sales tax nexus in Georgia. You do not have sales tax nexus in Georgia. Your supplier will charge you sales tax for the Georgia transaction unless you can provide proper resale certificate documentation. Georgia does not require an in-state permit to provide proper resale certificate documentation, so you do not need to get a permit in Georgia.
Example 3: You have a sales tax permit in California and are dropshipping to a customer in Florida. Your supplier does have sales tax nexus in Florida. You do not have sales tax nexus in Florida. Your supplier will charge you sales tax for the Florida transaction unless you can provide proper resale certificate documentation. Florida does require an in-state permit to provide proper resale certificate documentation, so you will need to get a permit in Florida if you want to purchase inventory tax-free from your supplier.
If you have specific questions and are unsure of where you need sales tax permits, consider TaxValet’s Done-for-you Sales Tax Service which includes consultations with a sales tax professional.