A Primer on Drop Shipping and Sales Tax Exemptions Part 1

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• Not only do quality professionals often command a hefty fee, but the rules are frequently changing and even the best employees are susceptible to human error.
• If you’re the seller, you’re generally required to collect sales tax only if you have nexus with the customer’s state.
• ‍When tariffs increase retail prices, shoppers tend to become more cautious and strategic, delaying purchases of non-essential or luxury items.
• You don’t need to invest in inventory upfront, and you can run your store from anywhere with an internet connection.
• If Adam sells a synthesizer to a buyer in Denton, Texas, he’s required to charge that buyer sales tax.
• That’s why choosing a reliable supplier is one of the most important steps in the drop shipping process.

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• The Arkansas distributor will be required to charge Illinois use tax on the sale to the retailer unless the retailer can present the distributor with a valid exemption certificate.
• If you’re transparent about your pricing—explaining that the cost jump is due to tariffs—some shoppers might remain loyal.
• To have physical nexus means that you have a physical presence in the state.
• The transaction between the manufacturer and the retailer is considered a resale transaction and should qualify under the resale exemption which applies in every US State.
• Drop shipping, as an eCommerce business model, involves intricacies in sales tax management due to the supply chain complexities involving sellers, retailers, and drop shippers operating across various states.
• 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.

For eCommerce brands, this shift means adapting quickly to remain competitive while safeguarding margins gross vs net and customer satisfaction. You don’t need to invest in inventory, which makes it an accessible option for new entrepreneurs. Even the most reliable suppliers can make mistakes, whether it’s sending the wrong product or missing a delivery deadline. Some suppliers specialize in certain niches, while others offer a wide range of products. It’s essential to find a supplier that aligns with your business goals and values.

How can I calculate sales tax for drop shipped items?

If you are the supplier, your business is the one accepting orders for resale. This might be through a partnership with an eCommerce company or an agreement with a multi-channel retailer. Upon receiving an order, you package and ship the goods to the seller’s customer but send the bill to the seller. A supplier’s sale to a seller is usually an exempt wholesale transaction because the seller is purchasing the goods to resell Coffee Shop Accounting them.

Drop shipment: simple yet complex for sales tax

For instance, when dealing with wholesale transactions, sales to nonprofits, or certain types of items that may be exempted from sales tax. There are a lot of advantages to drop shipping, which is why it might account for as much as 33 percent of ecommerce sales annually, according to Bloomberg. However, things start to get more complicated when drop shipping is involved.It’s important to note that in ecommerce transactions the “point of sale” is considered to be the buyer’s “ship to” address. It doesn’t matter where the buyer is located, only where the buyer takes possession of the item after it is shipped. But by the end of this article, you’ll be clear on your sales tax obligations, whether you’re a drop shipper, or a retailer working with a drop shipper. Localizing inventory within your key markets limits how often products cross borders and helps reduce tariff costs.

The retail transaction is not between the manufacturer and the customer and therefore, the manufacturer should not be held liable to collect tax based on the retail price. The transaction between the manufacturer and the retailer is considered a resale transaction and should qualify under the resale exemption which applies in every US State. Your vendor reserves the right not to accept your resale certificate.