Back to All posts
Beginner’s Guide to Drop Shipping Sales Tax
Beginner's handbook

Beginner’s Guide to Drop Shipping Sales Tax

By Reading Time: 4 minutes

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. Drop shipping 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 drop shippers

If you use a drop shipping company for your ecommerce business, during tax season you have to consider three parties: you, the customer, and the drop shipping 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
Tax Jar Nexus
Source: TaxJar

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 drop shipping

According to a 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 drop shipper. 

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

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%.

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 drop shipping 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 drop shipping.

How a resale certificate works with drop shipping 

If your ecommerce business uses a drop shipper, 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 drop shipper, 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 drop shipper. Here are the four different situations that may occur and what happens in each.

 Printful has nexusPrintful doesn't have nexus
You have nexusPrintful charges you tax unless you submit a resale certificate

You charge your customer tax
Printful doesn't charge you tax

You charge your customer tax
You don't have nexusPrintful charges you tax unless you submit a resale certificate and charge your customer taxPrintful doesn't charge you tax

You don't charge your customer tax

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 drop shipping 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 drop shipper 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.

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.

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

Nora has been part of the Printful team since 2015. She has spent the last several years writing content, coordinating communications projects, and helping customers learn about ecommerce. Now as Printful's Brand Manager, she gets to use her experience and knowledge in new and challenging ways.

If you enjoyed this post, subscribe to updates

Get actionable drop shipping advice in your inbox

Comments

  1. Alexander Coss

    This is all very confusing. My business is online and is based in California. So I charge CA taxes and have submitted my resale certificate to Printful, so I’m cool there.

    However, apparently Printful has a bunch of Nexus. Since I use Shopify, is there is a way to easily integrate tax collection based on the Nexus’s that you guys have?

    Alex

      1. Alexander Coss

        Thanks Mitch. What’s still confusing is this. If I set up all the states where Printful has a Nexus on Shopify. That mean that shopify will automatically calculate taxes on orders going to those states. So, for example, If I’m shipping to N.C. I will collect tax on my Retail price then Printful will charge me tax on the wholesale price. Does that the state will then collect tax from both of us for the same order? Like double dipping?

        Thanks.

        1. Mitch Stepanuks

          If you are collecting and remitting tax on a sale (meaning you have a sales tax permit for that state), then you should send us a resale certificate. Then we will not collect tax and there is no double dipping.

          [Updated 2021] If you don’t have a Resale certificate submitted to Printful, then you will be charged the sales tax for Printful orders (if they are shipped to the states where we collect the tax). If Printful collected the sales tax, it will be remitted to the state on behalf of Printful.

          I hope that helps!

          1. Bart

            Looking to clarify.

            I am based out of Delaware (which has no sales tax) and do not currently have nexus in any other state. If I setup Shopify to collect taxes from the sales which ship to states that Printful has nexus in, those collected taxes will automatically be passed on to Printful from Shopify? Meaning that the taxes collected will be deducted from the Shopify payout and passed on to Printful automatically. Thus, I will not be responsible for any remittance?

            Hope my questions make sense and thanks for your time.

            Bart

          2. Mitch Stepanuks

            Hi Bart,

            If you don’t have nexus, then you don’t need to collect sales tax. If you are looking to cover the tax we are collecting from you, then yes, that is one way you can do it.

            I hope that helps!

          3. bev Evans

            Can I clarify, If you Printful has Nexus in these other States, does that mean us retailers have nexus too in those States and we need to collect taxes there and remit? I appreciate NC and CA as physical but the others?
            And if we decided it was hassle to set up in other than our own state, printful charges retailer, and you submit the tax, but does customer get taxed?? thanks

          4. Mitch Stepanuks

            No, the only way Printful gives you nexus is if you are using our Warehousing and Fulfillment services. Otherwise, we don’t give you any nexus.

            If you don’t submit us a resale certificate, then we will collect tax from you and remit it. You can think about it as if we are collecting from the end customer through you.

            I hope this helps!

  2. Madeleine Binnie

    What if we want to do a basic order to stock our vending events? How do we order tax free to resell?

  3. Sarah

    If I’m an online retailer in Canada, and am only going to sell to Canadian customers, will there still be tax requirements because the fulfillment centres are in the U.S.?

  4. Cassie

    Hi Mitch,
    This does not makes sense to me… it does not seem right that we the online retailers are being charged tax instead of the customer directly. Because I am the seller to the customer, I should be the one collecting the tax from them not Printful. Who can I contact to discuss? And if Printful is collecting tax from me the reseller, then I should be able to submit my resale license/permit to be exempt from paying any tax. Thank you.

    1. Nora Inveiss Post author

      Hi Cassie,
      You are absolutely right – you can submit your resale license/permit to be exempt from paying any tax. To do this, go to Billing –> Resale certificate.
      Printful will still charge you sales tax on orders going to a state where we have nexus, because we’re selling to you, not your customer. But again, if you submit a resale certificate you will be exempt for that state.

  5. Xavier Cumberbatch

    I’m starting my Shopify store in New York. It’s not registered and I am just confused about sales tax. I am only adding shirts, hats, and hoodies to the store. Would I have to charge sales tax?

    1. Nora Inveiss Post author

      Hi Xavier,
      I recommend talking to a tax professional about your tax responsibilities! Generally, you would have to charge sales tax for states where you have nexus.

  6. Daniel Geester

    I want to sell in usa but from germany. And the complete taxes makes me so confusing. Because usa has a double tax law with germany, so mostly we havent to pay extra taxes because we pay in germany as well for our provisions. But i think this law is exclusively for royalties.

    Maybe you can help to get me a little bit clarity, because my tax advisor cant help me at the moment.

    Big thanks
    Daniel

    1. Nora Inveiss Post author

      Hi Daniel,
      It’s best to talk to your tax advisor about specifics!
      From Printful’s side, products that are fulfilled in the US and that ship to a customer in the US won’t incur VAT. Products fulfilled in Europe and shipped to the US will incur VAT, but not sales tax. In this case, the end customer may have to pay customs duties.

  7. Brian

    So if I understand correctly, I only need to collect sales tax for the state I’m operating in and possibly CA and NC. Since I don’t need to charge sales tax to customers from any other state, how do I then turn off taxes for those states? Is it done in WooCommerce or Printful?

    Thanks!

    1. Brian

      I just realized I just need to submit to Printful a reseller certificate for the state I operate in and collect taxes on all other states like normal. I think?

      1. Nora Inveiss Post author

        Hi Brian,
        Yes, you can submit resale certificates for the states where you have nexus. As for other states, it’s best to talk to a tax professional!

    2. Nora Inveiss Post author

      Hi Brian,
      You would collect sales tax for states where you have nexus – that can be where you operate, or where you’ve reached a sales threshold that gives you economic nexus. It’s always best to speak to a tax professional for the most accurate advice!
      You can adjust the taxes you charge your customers in your ecommerce platform’s settings.

  8. CJ

    What about UK/EU sellers, we have no links to the US so how do we do it? If we use printful and etsy, Etsy charges the customer tax i assume, I would pay tax on my purchases/costs from printful I assume, I dont really know what as a non US person im meant to do, I dont have a mechanism to pay taxes in US. Any ideas??.

    1. Nora Inveiss Post author

      Hi CJ,
      We recommend talking to a tax professional to learn where you should be collecting! Generally if you’re from the UK, you may still have nexus in a US state, whether economic or physical, so you may be liable to collect.

1 2 3 4

Comments are closed.



Back to All posts

Ready to try Printful?

Connect to an ecommerce platform or make an order

Get started
shares