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Beginner's handbook

How Drop Shipping and Sales Tax Work

By Reading Time: 3 minutes

With a traditional brick-and-mortar setup, a customer pays sales tax on transactions made in store. Simple. But sales tax get more complicated in the ecommerce space, especially when an online retailer partners with a drop shipper. That’s a whole new set of rules, and we’re here to clear them up.

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 off point to learn some basic information. Our recommendation is always to consult a professional for information specific to your circumstances.

Let’s start with the basics and go over some useful terms you’ll need to know.

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 online commerce, but here are a few common ways that a retailer could have nexus.

  1. If you have 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.

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 expansive definition of nexus, including different types like affiliate or click-through nexus, on TaxJar’s guide to sales tax.

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

Sales Tax is collected when a customer makes a purchase in a state where the retailer has nexus. If an online retailer has nexus in California and a customer from California makes a purchase, that customer gets charged sales tax.

Keep in mind that 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 rate, and the exact tax varies by locality.

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

A Resale Certificate is needed in order for the retailer to be exempt from paying sales tax on orders they purchase from a drop shipper to resell to customers. Some states don’t accept out-of-state resale certificates. In this case, the drop shipper has to collect sales taxes from the retailer.

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.

Before we go any further, we’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.

As mentioned above, laws involving sales tax get a little more complicated when a drop shipper is involved, because there really are two sales between two businesses and one customer:

1. The customer purchases an item from the retailer
2. The retailer purchases 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 how to 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 stateswhich 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. You can find out how to do that on this TaxJar blog post.

Again, we emphasize that you talk to a tax professional if you have any questions, but we hope this blog post serves as a helpful introduction to drop shipping and sales tax rules!

Nora covers all things ecommerce for the Printful blog. She appreciates good dad jokes, new books, freshly baked cookies, and evening jogs.

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  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.

          If you don’t have a sales tax permit in the state of a sale, then the taxes that the end customer pays will be passed on to Printful, and we will remit it.

          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.?

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