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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. 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.

  2. 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?

  3. 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.

  4. 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.

  5. Wezen

    Hi,
    Thanks for the great article to further help me understand about the different scenarios. I have some questions in your scenarios 1 & 2.

    Scenario 1 (Your office in M. Customer from C):
    Q1 – Resale certificate is presented. Reseller is not charged the sales tax. Who is responsible to collect tax from customer and pays it? Reseller or Printful? I suppose is the reseller.
    Q2 – No Resale cert presented. Reseller collects tax from customer, pays the tax to Printful. Does Printful file the tax return? And here, the reseller doesn’t lose any profit.
    Q3 – If above Q1 and Q2 are correct, does it mean that the responsibility for filing and paying tax in Q1 (is by the reseller) and Q2 (is by Printful)?

    Scenario 2: (Your office in C. Customer in C)
    Q1 – Same question to Q1, Scenario 1. Who is responsible to collect and pay sales tax?
    Q2 – Same question to Q2, Scenario 2. Who is responsible to collect and pay sales tax?

    Very much appreciate your advice on the above.

  6. Sarah

    Hi, thanks for all your helpful advice. I just want to clarify a few points before I go ahead and sell with your app. I’m an Etsy seller and I’m hoping to open a second shop to sell my designs with your integration.

    I’m based in the UK so I don’t have a nexus here, although as I understand – if I was not to apply to the IRS and supply you with a resale certificate for sales tax in CA and NC, then you would take this money from the sales of the items and pay the sales tax for any sales to these states and I would simply lose a little profit per item from these sales?

    I’m also wondering whether this would apply to VAT to the EU and the UK? Would you take the monies from the sales at source unless I was to supply a VAT registration number?

    If you could shed dome light on these questions I would very much appreciate it.

    Thanks in advance.

    1. Nora Inveiss Post author

      Hi Sarah! I recommend consulting a tax specialist to get the most accurate advice for your situation.

      With Printful, there are two transactions that place: you charge your customer when they make a purchase from you. And then we charge you for the product and fulfillment. So we charge you sales tax for orders that are fulfilled in CA and NC. If you submit a resale certificate, then we won’t charge you sales tax but it’s your responsibility to charge your customers if you’re liable.

      It’s similar with VAT – we charge you VAT on orders that are fulfilled in Latvia unless you submit a VAT ID. What you charge your customers depends on your store’s situation.

      Feel free to browse our tax FAQs here: https://www.printful.com/faq/taxes-and-fees

    1. Nora Inveiss Post author

      Hi Michelle! Not sure I understand your question. You only have to upload your resale certificate once, if that helps.

  7. Sarika

    Hi,
    I Am from India and now I am using printful as my dropshipper for usa and other countries. Do I have to collect sales tax on my site from the customer??? But I am an individual doing this dropshipping.

    1. Nora Inveiss Post author

      Hi Sarika! It’s best to talk to a professional about your obligations. It’s possible that yes, you may be liable to collect sales tax.

  8. Peter

    Thank you for the article, I too have a few questions as after a lot of Google searches I still haven’t found answers that apply to my specific situation. I understand that I should seek financial advice from a professional but I am curious to hear your thoughts also.

    So, I am UK based and want to start selling on my Shopify site through Printful.
    Am I right in thinking that because that scenario gives me nexus in the UK, CA & NC all I need to do is add those three taxes to my Shopify, tick the box that includes taxes in my retail price and that’s it? My customers are now paying those taxes and everything is taken care of? Also, should I add Latvian taxes since Printful now operates from that location too? And as for all other countries, I can just leave those those taxes at 0% because I don’t have nexus there right?

    I hope I am right, although if I am I find it confusing because what it essentially means is that there are two European countries (UK & Latvia) and two US states (CA & NC) where I make less profit as opposed to the rest of the world. It is this thought that makes me think that I might actually be completely wrong and I need to add taxes to every country I plan on having Printful ship to.

    I’d appreciate if you could help me out with these queries.
    Feel free to insult my intelligence in the process, I know virtually nothing regarding any of this lol.

    Thanks!

    1. Nora Inveiss Post author

      Hey Peter!

      Yes, definitely talk to a professional. But I can give you my two cents and clear up a couple of details.

      Sales Tax
      Because Printful is located in CA and NC, we charge you sales tax on orders going to those states, unless you submit a resale certificate to us for each state. Then we won’t charge you sales tax, while you may be liable to collect from your customers in CA and NC. Here’s our tutorial on how to set up sales tax on Shopify.

      VAT
      VAT is more complicated. Printful will charge you VAT only for orders that we fulfill at our Europe location with an end-address in the EU, unless you register as a VAT payer and submit a valid VAT ID. Then we’ll charge you a 0% VAT rate, while you collect VAT from your customers and remit to the country in which you’re registered.

      You do not have to register as a VAT payer or remit VAT to Latvia. You have to register and remit to the country in which you’re located, and it’s only mandatory if you’ve reached that country’s sales threshold. If your sales haven’t reached the threshold for your country, you’re not obligated to register and collect VAT. So if you’re in the EU and you’re not obligated to collect VAT and don’t want to deal with collecting and remitting, you don’t have to. Just take Printful’s VAT rate into account.

      You may be liable to register and remit in another EU country if you’ve reached their distance selling thresholds.

      I recommend taking a look at our FAQs about VAT here – they go into more detail and have resources on where to continue researching.

      1. Peter

        Thank you so much for the reply Nora! That has definitely cleared up a lot of my queries.

        One more thing though: Based on what you’ve said and the links provided as well as the reading I’ve done on the UK government website I am definitely not obligated to collect VAT here which, according to you, means that I will be charged VAT by Printful on EU to EU orders. So as far as setting this up on Shopify should I add VAT rates to all EU countries or does Printful automatically take care of that by charging me whenever an order of that nature takes place?

        1. Nora Inveiss Post author

          I’m glad I could clear some things up!

          Not sure I understand your follow-up question though – I’ll shoot you an email and we can continue there!

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