Sales Tax Implications of Drop Shipping
That article also includes a few countries that are better to be avoided when dropshipping. The following reference guide is for informational purposes only, and is not intended to replace professional tax advice. If you have further questions about whether tax legislation applies to you, then drop shipping sales tax you should contact US state tax authorities or a tax professional. Always check each state’s tax policy to make sure you’re staying within the rules. Minea analyses all online advertising to help you find the best products to launch, and the best creatives in your niche in just a few clicks.
- So, if you reside in the US, you’ll probably have to charge a sales tax only from local customers located in the same state.
- In this situation, they could be responsible for collecting sales tax.
- You, as a new or an already established dropshipper in the U.S., must understand your dropshipping business’ path to meeting the legal requirements and complying with the tax obligations in the country.
- That means it’s important to know the rules for each state, not only to comply with the law, but also to avoid a situation where both you and the shipper charge sales tax to the customer.
For example, someone wants to buy an item from your online store. They add that item to their cart, fill in their address, and then provide their payment information. And this is where the dropshipping payment processors come into play. First and foremost, we want to point out that there’s no exact answer to this matter since all dropshipping businesses have different requirements. Dropshipping source taxes are the taxes that you must pay to your supplier when you buy products from them to sell.
Resale certificates are only legally used when purchasing items for resale
When we talk about “collecting”, these are either sales taxes (US) or VAT (EU) that your end customer covers. In this post, we’ll explain the general rules around sales tax for dropshippers, plus how to comply with tax rules in major world markets. California is one state striving to make the difference between marketplace sales and drop shipping clear. According to the California Department of Tax and Fee Administration (CDTFA), marketplace sales are not drop shipments. It’s supporting that stance with a proposed amendment to its drop shipment regulation (Regulation 1706). Since drop shipping laws generally predate marketplace facilitator laws, they typically don’t stipulate how a marketplace transaction would impact drop shipping, or vice versa.
For the most part, when a retailer buys a product from a Supplier, that purchase is tax exempt because the product was bought for resale. But, the states want to collect their tax, and in their eyes, someone has to pay up. So if the Retailer does not have sales tax nexus in the state where the product is purchased, the Supplier may be on the hook to collect and pay sales tax. As mentioned above, you may not have to pay sales tax on what you buy from your dropshipping suppliers because you are a reseller. Whether your business operations are based in your home country or somewhere else, we have probably got you covered. Here, we will focus on the dropshipping taxes, particularly the sales tax, in the United States, Canada, and the EU.
Two sales in one
A resale certificate allows a retailer to buy products to resell without paying sales tax on those products. As a retailer, you can present your resale certificate to your vendor to let them know that they aren’t required to collect sales tax from you. The manufacturer/supplier bills the retailer for the wholesale price and the retailer then bills the customer the retail price.
Here you’ll also learn everything you need to know about the distance selling thresholds. Finally, since most dropshipping businesses are run at home offices, a local business license might not be necessary. But it’s always best if you contact your city to find out if you need it or not. Bear in mind that state policies can change; Tennessee recently began accepting exemption certificates issued by other states where previously it did not. 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.
Drop Shipping and Sales Tax, Demystified
If your business is located in the EU…Then you must charge VAT on each EU sale. If you remain below the thresholds and never register for VAT, then you run the risk of unhappy customers. If your goods are being imported from outside the EU, then upon delivery, the customer might end up paying some surprise VAT and import duties. 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. Usually you do not need to pay sales tax on the orders you make from your suppliers.
Finally, let’s say all three parties are located in different states. You in Virginia, the vendor in Oklahoma, and the customer in Texas. Now let’s say you are located in another state and don’t have nexus in Virginia, but the vendor does. In this situation, they could be responsible for collecting sales tax.