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Beginner's handbook

How Drop Shipping and Sales Tax Work

By 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.

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. Tony

    Hi there,

    Thank you for posting this article. This article and the questions from everyone have been really helpful, so thank you to everyone as well for their questions and comments. I live and operate my business from MD and have a Sales and Use Tax license in that state. I use Printful for their dropshipping and inventory. I understand that Printful is located in CA and NC. For clarification purposes can you tell me if I am getting the following correct:

    1. When it comes time to do my Sales and Use Tax return, if I made a sale from customers from MD, CA, NC, NJ or even from another country like Canada then I am only responsible for reporting sales I made with customers in MD, correct?

    2. I don’t need to get a Sales and Use Tax License for CA and NC if Printful is located there and I am using their dropshiping and inventory, only the state for which I am operating my business from (Maryland) correct?

    Again I appreciate this article and thank you for your time.

    1. Nora Inveiss Post author

      Hi Tony,

      I’m glad you found this blog post helpful!

      You should talk to an accountant to get the most accurate info on what taxes you’re liable to collect for your specific situation. If you operate your business outside of MD, then yes, you are probably liable to collect and remit sales tax for that state. Since you do use Printful for your inventory, that gives you nexus in CA and NC. This means you’re also liable for sales tax in CA and NC. Printful will charge you sales tax for orders going to CA and NC unless you provide us with a resale certificate.

      Again though, your best bet is to talk to a professional 🙂

  2. Marc

    Hi, i am based in the UK and im looking to sell on Amazon USA via printful. As i am based in the UK do i need to submit any forms or tax to the IRS in America? Or because i am only drop shipping and not storing stock in the USA i am exempt from that and only need to pay my local UK tax?

  3. Emi

    Hello. I’m from Romania looking to sell with printful via dropshipping in Europe and USA. I won’t focus on some specific zones. How should i pay taxes? I want to work alone by myself.

  4. Herbert Aguilar

    Hello, im from El Salvador (a latin american country outside US).
    I want to dropship with you guys and i cant find information on what taxes or fees do i have to pay. Could you please help me out, i dont want to be surprised with legal actions for doing something i dont even know.
    Please help, thankyou

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