Beginner’s Guide to Dropshipping Sales Tax

The tax rules and regulations featured in this post are the most current and up-to-date at the time of publishing.

With the traditional brick-and-mortar setup, a customer pays sales tax on transactions made on the spot. Simple. Dropshipping sales tax gets more complicated though—that’s a whole new set of rules. If your ecommerce business is located in the US, we’re here to help!

Keep in mind that we’re not accountants or legal experts, so this shouldn’t be used as professional advice. Use it instead as a starting point for learning some basic information. We always recommend consulting a professional for information specific to your circumstances.

Tax obligations for dropshippers

If you use a dropshipping company for your ecommerce business, during tax season you have to consider three parties: you, the customer, and the dropshipping company. Why? Because each of you could be in different states and have different tax rules.

Below, I will go through two most important tax terms for businesses: tax nexus and sales tax. 

What is sales tax nexus?

Nexus is the term used when a retailer has a presence in a particular state. A company’s presence can be difficult to determine in ecommerce, but here are a few common ways that you can have nexus:

1. If your company has a physical location (even if it’s your kitchen bench)
2. States you have employees or salespeople in
3. States you store inventory in (e.g. If you are using Printful Warehousing and Fulfillment Services)
4. States where you make enough sales, in dollars or transactions

For example, if your company’s headquarters are located in California, you have employees working remotely in Oregon, and your warehouse is in Texas, you have nexus in all three of those states.

You can find a more in-depth definition of nexus, including different types like affiliate or click-through nexus, on TaxJar’s guide to sales tax.

Nexus and dropshipping

According to software for automated tax compliance Avalara, if you have nexus in the state where the sale occurs, then you must collect sales tax from the customer, even if you’re working with a third-party dropshipper. 

Remember that you must register for a sales tax permit in each state where you have nexus in order to collect sales tax.

Learn more:

• What Is Dropshipping
• Is Dropshipping Worth It
• Branded Dropshipping
• Profitable Dropshipping Niches: How to Find Them + Top Picks
• How to Start a Dropshipping Business
• 15 Dropshipping Tips You Need to Check Before Starting Your Business

What is sales tax?

Sales tax is collected when a customer makes a purchase in a state where you have nexus. For example, If you have nexus in California and a customer from California makes a purchase, that customer gets charged sales tax.

Sales tax is passed on to the state government. It’s used to pay for state initiatives like schools, roads, etc. Each state sets its own sales tax rate.

How sales tax works

Let’s use Albert, Oklahoma as an example. Buyers in Albert, OK pay 6% in sales tax. This is made up of both the Oklahoma state tax of 4.5% and the district tax of 1.5%.

Set up your store’s taxes in three steps 

Use our step-by-step guide to understand your tax obligations, learn how to find professional tax advice, and set up taxes on your storefront.

Before we go any further, I’d like to point out that sales tax laws are different in every state, and they change frequently. So make sure you check the laws of any state where you think you may have nexus, and consult a tax professional if you have any questions or doubts. You don’t want to be surprised with a sales tax audit.

Important tax dates

Knowing on what dates you need to file your taxes is just as crucial as knowing where you have nexus. For a more stress-free tax experience, use a calendar to track your most important tax deadlines. 

Depending on your entity type, here are a few important 2021 tax deadlines that you should be aware of:

• March 15 S Corp (Form 1120-S) and Partnership (Form 1065) returns due
• April 15 C Corp (Form 1120) and Individual (Form 1040) returns due  
• May 15 Exempt Organizations (Form 990) returns due
• September 15 Extended S Corp (Form 1120-S) and Partnership (Form 1065) returns due
• October 15 Extended C Corp (Form 1120) and Individual (Form 1040) returns due

Remember: since sales tax varies by state, the tax return due dates will vary as well. Check your state’s department of revenue website for more information.

Tax-free resale  

If you’re using dropshipping services, there are opportunities to reduce your sales tax costs through a resale certificate.

What is a resale certificate?

To put it simply, a resale certificate lets you buy products without paying sales tax if you plan to resell them.

Most states accept out-of-state resale certificates. Let’s say you are registered to collect sales tax in Alabama. If you go to Texas and make a purchase for resale, the Texas law allows your Alabama-based vendor to accept your Texas-issued resale certificate.

Now let’s say you are registered to collect sales tax in Texas and you make a purchase for resale in Alabama. The state of Alabama doesn’t allow retailers to accept out-of-state resale certificates. This means you need to be registered to collect sales tax in the state of Alabama to be able to use a resale certificate with a vendor in Alabama.

Here are the states that don’t accept out-of-state resale certificates:

• Alabama
• California
• Florida
• Hawaii
• Illinois
• Louisiana
• Maryland
• Massachusetts
• Washington
• Washington D.C.

So there you have the basics. You, the online retailer, charge sales tax to customers that make purchases in states where you have nexus. Now we’re going to complicate things and throw in rules that apply to dropshipping.

How a resale certificate works with dropshipping 

If your ecommerce business uses a dropshipper, there are two sales that take place, between two businesses and one customer:

1. The customer purchases an item from you, the retailer.
2. You purchase said item from the dropshipper, who then ships it directly to the customer.

The tricky part is understanding who is liable to pay the sales tax and when. Let’s assume that you are the online retailer and Printful is your dropshipper. Here are the four different situations that may occur and what happens in each.

Printful has nexus in most states, which means we have to collect sales tax in those states. You will need to get a resale certificate if you want to become tax-exempt in your state.

Some states allow you to get a resale certificate online, while others require you to do it in person. You can find out how to get a resale certificate in this TaxJar blog post.

How to handle your dropshipping sales taxes

To sum up, here are the key points all online retailers should remember when it comes to taxes in the US:

• Your sales tax obligations as an online retailer vary from state to state.
• You need a resale certificate when buying from a dropshipper like Printful, otherwise, the dropshipping company will have to collect sales tax. 
• Mark down important sales tax dates to file your tax returns on time.

To download this infographic as a PDF file, click here. Source: Printful. 

The best thing you can do for yourself and your business is to consult a tax advisor. Experts can help guide you through and take care of the tedious items for you.

Read next: Is Print-on-Demand Good for Beginners: The Ultimate Guide

This blog post was originally published in September 2015; it has since been updated.