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How Drop Shipping and Sales Tax Work

By Nora Inveiss - Reading time: 4 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.

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, as outlined in TaxJar’s “Intro to Sales Tax for Online Sellers”:

  • Home state nexus: the state in which a retailer operates his/her business
  • Employee nexus: the state in which a retailer has employees
  • Inventory nexus: the state in which a retailer stores his/her inventory

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. 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. For example, the California State Board of Equalization writes that:

“The statewide tax rate [in California] is 7.5%. In most areas of California, local jurisdictions have added district taxes that increase the tax owed by a seller. Those district tax rates range from 0.10% to 2.00%.”

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. Note that some states do not accept out-of-state resale certificates. In this case, the drop shipper “…is obligated to collect sales taxes from the vendor if they are registered in the state where the customer is located” (Avalara, “Drop Shipping and Sales Tax”).

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 go through some common examples to clarify. For each example, assume that you are the online retailer and Printful is your drop shipper. We’ll focus on sales tax laws in the state of California, since that’s where Printful HQ is located.

1. Your office is in Michigan. A customer from California makes a purchase.

Since Printful has nexus in California, we are required to charge you sales tax on your wholesale purchase from us unless you present a resale certificate that is valid in California. Sales tax is then collected from the customer.

Send Printful your resale certificate by going to settings > stores > edit > resale certificate.

2. Your office is in California. A customer from California makes a purchase.

In this case, both you and Printful have nexus in California. You need to present your resale certificate to avoid sales tax on your wholesale purchase from Printful. Sales tax is collected from the customer.

3. Your office is in Michigan. A customer from Florida makes a purchase.

In this scenario, neither you nor Printful have nexus in Florida and you do not need to collect sales tax. You do not need to pay sales tax for your wholesale purchase.

4. Your office is in Michigan. A customer from Michigan makes a purchase.

Here, you have nexus in the destination state, while Printful does not. It is therefore your responsibility to collect sales tax and Printful will not charge sales tax on your wholesale purchase.

Sales tax rules in California can be particularly confusing, so if you do use Printful as your drop shipper, make sure you’re complying with all of the state’s laws. Are you charging the right amount of sales tax? Do you have your permits in order? Are you submitting your sales taxes in time? Take a look at the California State Board of Equalization website for more information.

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.

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  1. Mike

    I’m assuming that for now, international businesses that use Printful aren’t required to pay or collect Sales Tax when selling to US-based customers..?

        1. Nora Inveiss Post author

          Using a warehouse like FBA or a drop shipping like Printful does give you a physical presence in the US and requires you to comply to that state’s sales tax laws. Excerpt from the Taxjar article: http://prntscr.com/fdailk

          I’m talking strictly sales tax though, so you’re right that this might not qualify as presence for other types of US tax.

  2. Herb Coulter

    I just read over the TaxJar article referenced above and in it’s Common Nexus Types diagram it says “Drop shipping doesn’t apply to either scenario”. I’m not sure what to make of that since your article seems to say it does.

    Also we drop ship from several WD’s who also sometimes drop ship directly from the manufacturer who may be in a completely different state than either of us. Should we just be collecting sales tax from every state just in case?

    1. Nora Inveiss Post author

      Hi Herb,

      That’s interesting – I didn’t notice the diagram says “Drop shipping doesn’t apply to either scenario.” All of the other research I’ve done on this subject says that yes, dropshipping does constitute nexus.

      Part of what makes this confusing is that every state has different sales tax laws. I suggest looking up the rules for every state from which you dropship. Taxjar is a good place to start; they list general tips for each state. But ultimately consulting a tax professional is the safest route. Good luck!

  3. Fabian

    Hey, thanks for the article, even though the comments are a bit confusing 😀

    I’m an international seller from europe and am only gonna offer Printful products on my store.

    Is it normal that my customers from California are charged the 7.5%? Is the idea that I charge the customer and you get the 7.5% from me? If so, does Printful charge the taxes automatically in the billing process or do I have to pay it manually?

    Or am I supposed to pay the taxes from my profits directly to the State of California? Oor… Do I have to collect the taxes from the customer and then pay the taxes in Cali?

    Would appreciate the help! 🙂 If you have a way to contact an expert for free I would appreciate that too, this whole tax-thing came as a surprise 😀


    1. Nora Inveiss Post author

      Hi Fabian,

      Yes, it is normal that your customers from California are charged sales tax. Basically, you need to upload a California Resale Certificate so Printful doesn’t charge you sales tax. Then, you become responsible for collecting sales tax from your end customer. You can set this up automatically depending on which ecommerce platform you’re using. You’re also responsible for filing sales tax for the state of California.

      We always recommend talking to an expert with your questions, although I don’t know of anybody who could consult for free.

      Keep in mind that we also now have a branch in North Carolina, so you’ll have to set up sales tax for that state as well. More info on North Carolina here.

  4. Chelsea

    So for the resale certificate, I only need ONE resale certificate to collect tax from customers in my state, no sales tax in in most other states, and will be charged tax from Printful because CA and NC?

    I don’t need to fill out and apply for 50 resale certificates so I can sell on Printful legally?

    If you sell something through Printful but don’t have a resale certificate, are you technically doing business illegally? Should we not ‘enable tax’ on our ecommerce plugins?

    Set up is so easy on online POD platforms like Printful, Society6, Createspace, etc. So I’m sure there are thousands of people, sitting at home, setting up shop and not even thinking about resale certificates, EINs, TRNs or DBAs…are all these people then doing business illegally? =(

    1. Nora Inveiss Post author

      Hey Chelsea!

      First, we always recommend talking to an accountant or tax professional to get the most accurate info.

      But yes, you will need to collect sales tax from your state, because that’s where your business is located. And from CA and NC, because that’s where we’re located. You’re not obligated to collect from all states.

      You’re not doing business illegally if you don’t have a resale certificate. We charge you for orders going to CA or NC, so the sales tax is being paid. With a resale certificate, the sales tax charge gets passed along to the end-customer, so it just means you’re not losing profit.

      1. Alec Larson

        If I don’t get a resale certificate, can I still pass the sales tax onto the customer, and then use that to pay Printful? If I did that, I would *not* be losing profit. I’m just curious if that’s allowed, in your opinion.

  5. Danielle Di Vincenzo

    Great article! Here’s my question: as a Canadian company using Printful as my sole dropshipper, I understand how the sales taxes get applied for sales destined within USA (specifically California and North Carolina). But I’m unclear on whether I’m supposed to charge sales tax (HST) on products destined for delivery to Canada from Printful. Although my office is in Canada, I keep no inventory here—everything sold on my website will go through Printful. So, do I tax my Canadian orders? Or is that what ‘customs and duties’ fees are? Yikes, I should know this but I don’t. Any help would be appreciated. Thank you!

    1. Nora Inveiss Post author

      Hey Danielle! These are all great questions! I think your best bet is to talk to an accountant or tax professional to get the most accurate info 🙂

  6. Matty

    Thank you for the helpful article! If I decide to not get or upload a resale certificate for CA and NC (I am based in WI) and have a sale in one of those states, does the tax that Printful collects from that sale cover the tax requirements for those states? Or am I still responsible for reporting that to both CA or NC? Thank you!

    1. Nora Inveiss Post author

      Hey Matty! If you don’t upload a resale certificate for CA and NC, we charge you sales tax on your purchase from us. So we would collect enough sales tax, but it would eat into your profit.

  7. Jeffrey

    Hi, Great article and I think I understand it all. But I just can’t figure out one thing. If my shop has nexus in NJ and a customer from NJ purchases a product, I have to charge sales tax. But if the Printful plugin overrides my tax capabilities, how do I charge the sales tax? From what I can see, the Printful plugin only adds tax to those in CA or NC, correct? Thanks.

    1. Nora Inveiss Post author

      That’s a great question! Which ecommerce platform do you use? You should still be able to edit to edit your shipping settings in your platform to charge other states.

    1. Nora Inveiss Post author

      Yup! You may also need to collect from Florida since that’s where you’re located. I also recommend consulting a tax expert to make sure you’ve got everything in order.

  8. JayLee

    Thanks for the info, very confusing but your responses have been helpful in understanding the process. My question is: How long does it take to get these Resale Certificates issued from NC and CA?

  9. Tessa

    Glad I stumbled across this – just to confirm your response to Matty.
    – If the only nexus that exists in my business is through Printful in CA and NC
    – If I don’t use a resale certificate and Printful charges tax on the customers purchase to CA,NC
    – I currently live in CO, but have no physical business presence or inventory (only using Printful) and will soon be residing/selling in the UK
    – Then my business is relieved of reporting sales tax to either CA or NC?

    I just started selling using Shopify and didn’t realize my sales tax scenario via drop shipping from Printful.
    Thank you!

    1. Nora Inveiss Post author

      Hi Tessa! I would consult a tax specialist about your specific situation. You may also still have a presence in CO. Even if you don’t store inventory there, it is the place where you run your business. Moving to the UK also might not mean you’re exempt from collecting sales tax, as you’re still operating a business in the US. But again, I suggest reaching out to a specialist.

      1. Tessa

        Hi Nora – thanks for your response. I understand the best solution is to consult a tax specialist. Was hoping to get this nailed down so I could move forward!

        1. Tessa

          Hi Nora,
          I wanted to follow up with this as it may help others. I did consult a sales tax specialist here in CO. If I am doing business here at all I have a sales tax nexus and would need to collect taxes for both Denver and CO sales. If I’m db out of the country I wouldn’t be liable for CO tax collection but would be potentially liable for collection of sales tax in your warehouse states of CA and NC.

          He suggested I research those two states for what their policy is on collecting tax from drop shippers within their states. I would think Printful would have the details on this – can you point me in the right direction? Thank you!

          1. Liva Spandega

            Hi Tessa,

            Thanks for the info! For more information on sales tax rules in California, you can check out this link (it’s also linked to in our post), and for North Caroline, you can take a look at the info provided by North Carolina’s Department of Revenue (click here ).

            Taxes can be tricky to handle, so it really is best to consult a tax expert whenever you’re in doubt about something.

  10. Jessica

    Hello, I’m just confused on NC, it says to register for a sales tax permit? Even though I’ll be using the resale certificate. Do I need to apply for sales tax permit as well for CA?

  11. Michael Morrison

    Can you help me clarify one thing related to what you said about “Employee Nexus”? Employee nexus: the state in which a retailer has employees.
    In the case of a border city (ex. Omaha near both Iowa & Nebraska). Is the nexus determined by where the employee lives? Or where the employee works?

    For example: Company HQ is in Iowa. Remote employee lives in Nebraska, but works in Iowa. Obviously nexus is established in Iowa, but is it in Nebraska simply because that’s where the employee lives? Thank you for your advice!

    1. Nora Inveiss Post author

      Hi Michael! I suggest talking to a tax professional about this; I’m not sure what the answer is here.

    1. Nora Inveiss Post author

      Hey Raza,

      Glad this post has been helpful! Each state is different. In California, it may be issued instantly if you submit online.

  12. sophie

    Hello, I just wanted to clarify with what you are saying to make sure i understand. Im just getting into starting drop shipping, I will be using amazon as my supplier and selling items on ebay.

    I’m located in california which is the only state i have nexus in. Now from what i understand is that whatever state amazon’s fullfillment centers have nexus in, i would need to charge sales tax on my customers who are in those fba nexus states?

    also, in your #4 scenario, I would have to collect the sales tax from my customer but amazon wont charge me sales tax for the item because they dont have nexus in my customers state, right? so in this scenario, i would have to report these taxes since i wont be using it to cover amazons sales tax charge? I say this because, i dont have a resale permit, so I will be adding 8% tax to my ebay price to cover amazons sales tax charge.

    which leads me to my next question, is this legal to do, since i dont have a resale permit, can i just add the estimated tax of 8% to my ebay price and use that sales tax to pay the sales tax when i order the item on amazon for the customer? hope i made sense, i guess im not sure in which of the 4 scenarios i would have to report these taxes to the irs? thanks!

    1. Nora Inveiss Post author

      Hi Sophie!

      I’d say your best bet is to consult a tax professional. We can give some suggestions, but it’s not professional advice.

      You might find this article about Amazon FBA helpful. And I don’t think it’s possible to charge sales tax unless you have the proper permits.

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