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Beginner's handbook

Beginner’s Guide to Drop Shipping Sales Tax

Dominique_Edward-guest-contributor-printful
By Reading Time: 5 minutes

Tax time is a dreaded season for many, especially for ecommerce businesses that work with drop shippers.

Staying compliant is no walk in the park, and with almost 11,000 sales tax jurisdictions across the US, it can be difficult to keep up. It’s not a secret that even the most seasoned sellers struggle to stay compliant.

If you’re an ecommerce business owner using drop shipping and are feeling unsure how to manage your taxes this season, don’t fret. We’re here to help.

But before we jump right in, let’s quickly review what constitutes drop shipping.

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

What is drop shipping? What is print-on-demand drop shipping?

Drop shipping is when the product you’re selling isn’t housed in your inventory. Instead, when you sell your product, you purchase that item from a third-party source and have them ship it directly to your customer. Essentially, you don’t handle your product through the buying and shipping process.

Like traditional drop shipping, print-on-demand drop shipping allows sellers to only purchase items when an order has been placed. Once an order has been placed, a third-party printer will automatically fulfill and ship the product to your end customers.

How it works

Let’s look at a quick example. Eddie owns an online store that sells custom t-shirts and hats. He’s looking into his options at Printful, and finds that he has two options:

  1. Create custom products on Printful and let the company fulfill and ship them once Eddie’s customer places an order
  2. Store his products at Printful’s warehouse and fulfillment center, and let Printful ship these products once an order comes in

If Eddie uses Printful’s products, he is using a print-on-demand drop shipping service. If he uses products from a different supplier but stores his inventory with Printful, he is using their Warehousing & Fulfillment service. Make sense? Now, let’s get onto the fun stuff: taxes.

Tax obligations for drop shippers

Let’s be real, trying to understand how drop shipping sales tax work can be quite a task.  

While you’re the one who sold the product to the customer, a third-party service fulfilled and shipped it. This means you have to consider three parties (you, the customer, and the drop shipping company) when tax time comes around. Why? Because you all could be in different states and have different nexus rules.

If you’re working with print-on-demand drop shipper, you most likely face less nexus rules than you would with a traditional drop shipper. This is because you don’t have inventory or a warehouse. Still, there are other nexus rules that might apply to you (which we’ll get to in the next section).

Sales tax nexus

Nexus is when you have a presence or significant connection to a state. Your sales tax obligations as an online store owner vary from state to state. Most of the time, however, a physical presence or economic connection to a state creates nexus.

Today, a presence or significant connection to a state includes:

  • Offices
  • Warehouses and distributors  
  • Employees
  • Affiliates (click-through nexus)
  • Making a certain amount of money or transactions in a state (economic nexus)
  • Doing physical business in a state for some time (i.e. trade show)
what-causes-nexus

Source: TaxJar

As an online store owner, you should pay close attention to economic nexus, click-through nexus, and warehouse location. Those three areas are quite applicable to your business and will likely determine your nexus requirements.

Nexus and drop shipping

According to 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. That said,  you need to know where you have sales tax nexus and what the rules are in that particular state or states.

How it works

Say Eddie launched his online store and wants to start selling products to folks in Texas. Unless he has nexus in Texas (a significant presence or connection to the state), he isn’t required to collect sales tax from his customers.

Cases where Eddie would be required to charge sales tax:

  • If he were to work with an affiliate, like a retailer in Texas who sells the same line of products and is under the same business name
  • If he were to use facilities or employees in Texas to advertise and promote sales for the company, or collect exchanges and returns from customers in the state
  • If he had a distribution center or warehouse in the state that delivers products to the consumer in the state

In order to be diligent, Eddie would have to further explore the nexus implications of every state where he wants to sell. This is a good opportunity for Eddie to meet with a tax advisor to talk it over and make sure he’s staying compliant.

Printful collects sales tax from customers in 36 states unless they have a resale certificate (we’ll get to resale certificates in a minute).  This is because Printful has nexus in these states, so they’re required to do so by law. The profits from sales tax charges go directly to the state government, not Printful.

Important tax dates

Knowing what days you need to file your taxes is just as crucial as knowing where you have nexus. For a more stress-free tax experience, we recommend using a calendar to track your most important tax deadlines. Stay informed and don’t let your important tax deadlines sneak up on you!

2019-tax-deadlines

Depending on your entity type, here are a few important 2019 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 16 – 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

Since sales tax varies by state, your sales tax returns due dates will vary as well.

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

A resale certificate is a document that allows sellers to buy items for resale without paying sales tax. You can only purchase items with a resale certificate if you intend to resell the items or the purchased items are used to create something you intend to sell (i.e. fabric to make curtains to sell).

How to obtain a resale certificate

The short answer: it depends. While some states accept a sales tax permit as a resale certificate, others require you to get a resale certificate in addition to having a sales tax permit. Some states allow you to get a resale certificate directly online, while others require you to fill out a form.

We recommend you ask your state or look up what is required to get a resale certificate or permit in your state.  

Where can I use a resale certificate

Not all drop shipping companies will accept your resale certificate, and they have the right to do so. Since sales tax varies from state to state, each state has its own policy on resale certificates and where you can use them. For example, there are 9 states that don’t accept out of state resale certificates unless you register for a sales tax permit in that state.

states-that-dont-accept-out-of-state-resale

Source: TaxJar

If you’re a retailer using drop shipping and you have a resale certificate or the equivalent, you won’t have to pay sales tax. If for some reason your retailer or wholesaler doesn’t accept your resale certificate, don’t fret. There may be more opportunities to get back the sales tax you had to pay.

Printful accepts resale certificates, so make sure to submit yours if you don’t want to pay sales tax yourself.

How it works

Eddie lives in Utah and decides he wants to sell custom t-shirts through Printful. Since Printful has nexus in this state, they have to collect sales tax from Eddie. But if he doesn’t want to be charged sales tax and save some money, all he needs to do is prove he has a registered sales tax permit and present it to Printful with the Utah Form TC-721 Exemption Certificate.

How to handle your drop shipping taxes

It’s pretty clear that when it comes to tax time, working with drop shippers has its complexities. As an ecommerce entrepreneur with a growing business, you need to be serious about staying up to date on the latest rules and knowing what’s required with nexus.

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.

Dominique_Edward-guest-contributor-printful
Dominique Edwards is proud dog mom, die-hard Nebraska fan, and an Account Analyst at ScaleFactor, a finance software company changing the way modern businesses operate.

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  1. Aliyah Schick

    Thank you for this attempt at explaining your position. I still think there is a serious flaw in this reasoning. You are not selling a product to the customer in a given state. Selling a product surely must be the fundamental, originating requirement for collecting sales tax. You are not collecting payment from that customer. You are selling the product to ME and delivering it to the address I give you. Doesn’t that mean the entire monetary exchange is between your nexus and my address, having nothing to do with my customer? You have no sales relationship with my customer. Why would you be charged or charging sales tax based on merely delivering a product with no sales process involved? That makes no sense. You are just providing me the service of mailing the product to the address I provide, for which I pay you.

    I would appreciate a clearly stated answer to this, one that effectively addresses my point. There is significant cost involved here, and if your logic is wrong, this tactic is a big mistake not only for us but for your business as well. Please either convince me (and your other business buyers who seem as confused as I am), or correct this. This article valiantly tries to explain, which I appreciate, but still does not answer the basic question of why you have any involvement in MY customer’s sales tax. Can you see that we don’t understand why your nexus even relates to OUR sales to OUR customers?

    Thank you for addressing this.

    1. Mitch Stepanuks

      Tax is always a complex subject, and the laws around online sales and drop shipping makes it even more confusing than for physical business.

      When it comes to PoD and drop shipping relationships, the law acts as if the drop shipper (Printful in this instance) is selling to your end customer as well, meaning that we are required to collect sales tax on these orders. You can read more here.

      https://blog.taxjar.com/drop-shipping-sales-tax

      Our finance team worked closely with our CPA throughout this process. We’re one of the first PODs to comply with changes from South Dakota vs. Wayfair, and we’re committed to following the updated regulations and communicating with our customers with it.

  2. Susan Scott

    I have an ETSY shop, operating out of NYstate, and so I COLLECT tax from customers in NYstate. ETSY automatically charges tax to the customers in random states that require it and ETSY pays those states those taxes. I pay the NY sales tax.

    If I were to start using Printful for printing and shipping ONLY (not warehouse and fulfillment) – and I submit a resale certificate, then you would not charge ME any taxes for printing, the product that the printing is on, or the shipping.

    However, do I need to start COLLECTING tax from customers in NC and CA? In other words, do I now have a nexus in CA and NC because I am using your printing and shipping services that are located there? And how do I know which state is printing/shipping each individual sale?

    You cover how I pay you tax for services & products unless I submit the resale certificate but do not totally clarify in what situation, other than in NYstate, I would need to charge my customers sales tax.

    1. Mitch Stepanuks

      If you are only using Printful for Print-on-demand and not for Warehousing and Fulfillment, we don’t give you nexus in NC and CA, as we are not storing the inventory for you.

      However, you still need to check as you may have nexus in other ways – I recommend reading this guide!

      http://www.taxjar.com/guides/intro-to-sales-tax

      If you don’t have nexus, then you don’t need to collect and remit sales tax, even though Printful may need to collect and remit it.

  3. Matt

    para vendedores no residentes en USA, como aplica las obligaciones de impuesto a las ventas?, que permisos debe tener para vender en linea?

    1. Ana Llorente

      ¡Hola!

      No somos especialistas en temas de legalidad, así que te aconsejamos que contrates a un profesional para estudiar tu caso concreto.
      No obstante, podemos decirte que incluso aunque no estés físicamente en un estado, puede que estés sujeto a cargar impuestos a tus clientes.
      Puedes encontrar algo más de información aquí (ENG)

      ¡Saludos!

  4. Keith Berringer

    I am from Canada and have a shopify web site which is just being set up with Printful as well I hope. I have acquired a California Certificate of Registration – Use Tax Account. This is so I can Drop ship products from a California Manufacturer pay the tax to the Drop Shipper and collect the tax as the retailer. The drop shipper has to collect the tax from somebody. How does Printful work the tax with a Canadian retailer? No Nexus here.

  5. Sonny Tackett

    I have a website being built by Volusion. I’m a longtime singer-songwriter and will be using printful to do on demand printing and fullfillment.My website is a few weeks away from going live.I need all the info I can get to make sure taxes are correct, and to build products, of which I have many. I need to know pricing, and how to determine pricing, my share, yours, etc. I will be using paypal and I also sell many products from my own line of stagewear. I need to know if it would be profitable to add my brand to your Ts,etc. Ill send you a copy of my brand logo to determine its use. Im working with Volusion to consolidate with you for my merch,and my items from S T Stagewear and Chameleon Speaker Systems, which I own,cdbaby for my media, and Amazon for my books. Thanks so much, Sonny Tackett, Moondancer records

  6. susan scott

    If not using Printful warehousing and only the printing and shipping on individual sales, is just paying printful the tax on each item the easiest thing to do?

  7. Denis Loubet

    So basically you have to be a tax lawyer to even think of selling anything over the internet. (Hyperbolic I know, but not by much.)
    That’s insane.
    Am I supposed to believe everyone selling shirts with Printful is an MBA? I don’t believe it.
    This is my frustration talking. I would rather rip my own skin off than become a tax lawyer. I’ve been setting up a store, but now I have to seriously reconsider.

    1. Mitch Stepanuks

      Tax is always a confusing subject, and the laws around online sales and drop shipping makes it even more difficult than for physical business.

      We recommend looking at TaxJar’s guide to get started!

      http://www.taxjar.com/guides/intro-to-sales-tax

      I’m not a tax specialist, so I can’t give specific tax advice, but here are some suggestions.

      When working with Printful, you should focus on two things.

      1. Figuring out where you have nexus

Look at the different types of nexus and figure out where you need to collect sales tax.

      2. Getting registered where you have nexus

. Once you know where you need to register, you can go and get a sales tax permit and a resale certificate.


      Once you do these things, you can look in more detail at things like filing dates.

      I hope this helps!

  8. Logan Bear

    To clarify, when you state “Printful collects sales tax from customers”, using your example, that would mean that Printful collects sales tax from Eddie based upon Printful’s charge for the item. Printful does not collect sales tax from Eddie’s customers. That would be a possible requirement for Eddie.

  9. Carol

    Dominique’s post is a good start, but I would not have been able to grasp the details without following Mitch’s links to TaxJar – an excellent resource for me as I know nothing about the subject, but am beginning to figure the tax issues out. Also at TaxJar, I recommend the video by Michael Fleming.

    I’m still confused on a point. If I have my Resale Certificate I will be collecting tax from a customer in my state (which I then pay to my state), but does Printful also collect tax from that customer b/c Printful has nexus in my state? Isn’t this like double taxing or is it comparable to the international VAT that charges more when a “middle-man” or 3rd party is involved?

    Thanks

    1. Mitch Stepanuks

      Hi Carol!

      Thanks, I’m trying my best to help everyone out.

      In your case, once you have a resale certificate and submit it to us, then Printful will stop collecting sales tax on orders to that state. Otherwise, you’re right, it would be double taxed, which it shouldn’t. This means that you will be responsible for all taxes on your end.

  10. Susan Scott

    To the best of my ability, I have determined that no, I do not have nexus anywhere except NYstate – IF it is true that if I am only using PoD and shipping, that does not create a Nexus (I wish that was more clear in all of these articles that YES I HAVE READ)

    From my comment up at the top, you said “If you don’t have nexus, then you don’t need to collect and remit sales tax, even though Printful may need to collect and remit it.”

    So WHO you would need to collect from and remit to. Me? And in what cases? Why do you say “may need to”?

    1. Mitch Stepanuks

      Hey Susan,

      If you are only using Printful for Print-on-demand and not for Warehousing and Fulfillment, we don’t give you nexus in NC and CA, as we are not storing the inventory for you.

      In cases where you don’t have nexus but Printful does, we still collect sales tax from the sale (in this case we are collecting from the end customer through you) and remitting to the state government that the end customer is in.

      We say “may” as there are a lot of different cases where we don’t need to collect sales tax. Some examples include Sales Tax Holidays and other exemptions. We can’t give a blanket answer as there are many different factors.

  11. Yinna Wang

    When you state “Printful collects sales tax from customers”, do you mean specifically when I purchase items directly from Printful ie products to physically resell myself? Or do you mean you collect sales tax from my end customer?

    Because if I just have nexus in the state where I’m located, and I don’t purchase anything from Printful to sell myself, I ONLY use them for printing and shipping to end customers, then I don’t need a resale certificate. Right?

    1. Mitch Stepanuks

      Hi Yinna,

      When you use Printful to print and ship, you are technically reselling the product, even though we aren’t sending it to you first. You are buying the printed product from us, and then reselling it to the end customer.

      This relationship means we are both responsible to collect sales tax from the end customer, and the only way Printful is able to do this is through you. Therefore, you should look into getting a sales tax permit and resale certificate.

  12. E.

    I’m from Europe and we already have a 20% VAT attached to our sales so I’ve already added 20% to my prices. I assume this is enough to cover me for the madness going on in the US. I have no need to register for anything in the US or give tax in the US as Printful will be handling all that for me and forwarding that tax to the US government. Is this correct?

    1. Mitch Stepanuks

      Hey there!

      I’m not a tax specialist, so I can’t give you specific tax advice, but I will try my best to help.

      The highest sales tax rate I have seen in the US is 11.5%, so your 20% definitely will cover that.

      “Printful will be handling all that for me”, is not quite correct. Because you are based in Europe, you probably don’t have physical nexus. However, you should still check if you have economic nexus in any state, as you may need to collect and remit sales tax there.

      This blog post has more info about selling to the US from Europe

      https://blog.taxjar.com/international-sellers-deal-sales-tax-u-s

  13. Carlos

    When you say “Printful collects sales tax from customers”, does that mean that printful would collect taxes for all states that require tax collection I have customers in buying my items?

  14. Carlos

    So when you say “Printful collects sales tax from customers”, does that mean you collect taxes from for your drop shipper customers in all states the customer provides items to?

  15. Bev Evans

    Thanks you, that’s cleared it in my mind a little more, could I just clarify……..
    1) Ineed to get a sales tax certificate for the State I am in, right?
    2) Then the States that do not accept out of State Certs, would I need to register with those before I even make a sale there?
    3) Would I need to fill out quarterly sales tax returns for all States I have a re-sale cert, even if I have made no sales, like I would for my own State, or do you just report if you have sales for that quarter?

    I was thinking I would have to register separately in 36 States and do returns for all, your clarification would help if you’re able to, thanks!

    1. Mitch Stepanuks

      Hey Bev,

      I’m not a tax expert, so I can’t give you specific advice.

      You need a sales tax permit in each state you have sales tax nexus (not Printful), which would include the state you are in. This will also allow you to get a resale certificate.

      For states that do not accept out of state resale certificates – you don’t have to register if you don’t have sales tax nexus, but then Printful will need to collect sales tax on sales to those states. I recommend reading this blog post:
      https://blog.taxjar.com/9-states-that-wont-accept-your-out-of-state-resale-certificate/

      And yes, you should file a sales tax return every time you have a filing due, even if you didn’t collect any sales tax over the taxable period. If you don’t, the state could charge a penalty or even revoke your license.

      You should read more here:
      https://www.taxjar.com/guides/intro-to-sales-tax/

  16. Dave

    “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.”

    Then, why am I in this page? Smh. As a dropshipping provider, you have to tell us where is your nexus etc. on each sales so that we can calculate it? or give us an option to choose one state only so that we don’t have to try predicting the future…

    1. Mitch Stepanuks

      Hey Dave,

      Unfortunately, we aren’t sales tax experts here, so we can’t give professional advice. You should go to an expert for that. We are just trying to give you as much information as we can to make the process easier for you.

      You can find the full list of states we have nexus in here: https://www.printful.com/faq/sales-tax/371-which-states-does-printful-charge-sales-tax-in-
      And another in-depth guide to sales tax here: https://www.taxjar.com/guides/intro-to-sales-tax/

      I hope this helps!

  17. M G

    I am in GA with a sales tax cert and sell through Etsy. All I need to do is send you my cert and Printful will not charge me tax, correct?

    1. Mitch Stepanuks

      Hi M G,

      If you send us your resale certificate for GA, then we will stop collecting sales tax on orders to GA.

      I hope this helps!

  18. Iryna Griffith

    I am confused
    I am located in UK. Sell from eCOMMERCE store in UK and Europe. Printful adds 20% to it’s price when bills me. I use Printful factory in Lithuania . Does it mean I paid Uk VAT tax, or is it some other tax and I have to add another 20% to my resale prices?
    We must only register for VAT if our VAT taxable turnover goes over £85,000 . And if I am not VAT registered why do Printful have to charge me extra 20%?
    Thank you

    1. Mitch Stepanuks

      Hi Iryna,

      Yes, you are paying UK VAT. Printful needs to collect VAT on sales to the UK as we are registered in the UK, it doesn’t matter if you are registered or not. You can learn more about VAT from our video here: https://youtu.be/LiqGcE267UA

      I hope that helps!

  19. Larry Domin

    I sell at a flat rate which includes shipping and taxes. Printful charges the applicable tax to each purchase when necessary. Do I still need to file and pay the taxes or dies Printful pay them in their nexus states since they are the ones collecting the tax?

  20. Alex

    Do I understand this correctly : I am in Europe (netherlands) .. no physical nexus in the US. However I am using printful for print on demand and selling to people in the US. Do I have to be think about sales tax ?

    1. Nora Inveiss

      Hi Alex,
      Understanding tax requirements for European retailers selling to customers in the US is tricky, it’s best to talk to a professional to understand your tax responsibilities.

  21. Josh

    So, according to your video, if we use Printful print on demand drop shipping, it does NOT give you nexus.
    And also ive seen on TaxJar that common taxable exceptions are CLOTHING and food..
    So, the only thing i seem to need to consider is economic nexus, would you agree?

    1. Nora Inveiss

      Hi Josh,
      We always recommend talking to a tax professional to figure out where you have nexus. If you use Printful, you would have nexus if you use our warehousing service, but not for print on demand.
      You would also need to consider if you have physical nexus anywhere. And make sure to research what kind of clothing exceptions apply to you! Most often they apply to children’s clothes.

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