If a supplier doesn’t have proof of the exemption, they’ll be out of sales tax compliance. China now faces a 10% tariff on goods shipped to the U.S., adding more expense on top of previous tariffs from earlier trade disputes. This move targets a range of imports, from electronics to textiles, prompting companies to reevaluate sourcing strategies. Some businesses see reshoring American jobs or relocating factories to other parts of Asia as ways to minimize tariff costs.

Retailer and Reseller Relationships

Implementing these technology solutions can help e-commerce businesses involved in drop shipping effectively navigate the challenges of sales tax compliance. Integrating tax automation tools like Avalara or TaxJar and managing exemption certificates will contribute to a streamlined and accurate sales tax process. In recent years, the concept of sales tax nexus has evolved to adapt to the growth of e-commerce and online retailing. Besides the traditional physical nexus, states have introduced economic nexus laws to ensure that online retailers also collect and remit sales taxes.

What is a drop shipper and how does drop shipping affect sales tax?

This dynamic underscores why many leaders caution that such tit-for-tat policies might raise prices for both sides, dampening sales and complicating supply chain management. If you value control and have the resources to manage inventory, traditional retail might be the way to go. But if you’re looking for a low-risk, low-cost entry into e-commerce, drop shipping could be your golden ticket. Drop shipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party—usually a wholesaler or manufacturer—and has it shipped directly to the customer. I will be covering disparate state rules and drop shipment exemption certificates in more detail, as well as steps to help companies remain audit-ready.

Integrating Resale and Exemption Certificate Management

This approach can also bolster your brand image by showcasing reliability and fast shipping. It’s a practical way to weather the extra financial strain from new tariffs and continue thriving in a competitive marketplace. ‍Trump’s tariffs could raise prices for any product sourced from Canada, Mexico, or China, driving your cost of goods higher and squeezing your margins. You may need to pass some of these added costs to consumers, risk losing sales, or shift to domestic production. These measures also mean more intense customs checks, with potential delays or fines if paperwork isn’t spot on. Overall, you’ll need a robust strategy that includes rate comparisons, local fulfillment, or advanced supply chain practices to stay competitive.

Best Practices for Drop Shipping Sales Tax Management

Each state has its sales tax rate, and drop shippers are required to collect and remit sales tax drop shipping sales tax based on the buyer’s location. This means drop shippers must be aware of and comply with the sales tax laws and rates in the states where their customers reside. Sales tax nexus rules depend on the jurisdiction and can be based on physical presence, economic presence, or certain activities like inventory storage or employing sales agents. It is crucial for drop shipping businesses to familiarize themselves with the nexus rules in each state they operate in. As e-commerce businesses continue to grow, managing sales tax compliance becomes more complex, especially in the context of drop shipping.

• You have registered for a permit and set up your website to collect there.
• Learn the basics of FICA taxes so you know who needs to pay them and how much they are.
• Tax automation software, like Avalara and TaxJar, can help e-commerce businesses handle the intricacies of sales tax calculations for drop shipping.
• This is a bit trickier and changes depending on where you and your dropshipper have nexus.
• That is, unless the Retailer can provide the Supplier and/or the state with an exemption certificate.
• “Nexus” refers to a connection between a company or a person and a taxing authority or a jurisdiction.

What is the Difference Between a Sales Tax Exemption Certificate and a Resale Certificate?

• There are a lot of advantages to drop shipping, which is why it might account for as much as 33 percent of ecommerce sales annually, according to Bloomberg.
• By now, you are probably gaining clarity on what role your company plays in the drop shipment relationship.
• If you are the seller, this typically means you’ve accepted an order from a customer for an item you do not have in stock.
• This dynamic underscores why many leaders caution that such tit-for-tat policies might raise prices for both sides, dampening sales and complicating supply chain management.
• Staying on top of potential tariffs—alongside any official earnings call from major industry players—helps you make quick, informed pivots.
• Customers are generally responsible for paying import duties, taxes, and fees upon delivery.

In this guide, we’ll break down what’s changed, why these tariffs matter, and how you can respond effectively. You’ll gain insights into historical tariff trends, evolving consumer behavior, and actionable strategies like local fulfillment, optimized shipping routes, and supply chain diversification. With expert tips and tools from platforms like Easyship, you’ll be equipped to manage duties, minimize costs, and stay resilient in a fast-changing trade environment. This inventory management software, compatible with Zebra and Honeywell brands, offers a payroll built-in barcode scanner that makes it easy to track inventory levels in real-time. Even though you’re not physically handling the products, having a clear picture of your inventory can help you make informed decisions and avoid stockouts.

However, in ten states you are required to register for a sales tax permit and collect sales tax from all buyers in that state in order to take advantage of the perks of having a resale certificate. Bobby Buyer is located in a state where Ron Retailer has sales tax nexus. If Ron doesn’t have sales tax nexus in Bobby’s ship-to state, then he isn’t required to collect sales tax from her. For example, Adam runs an online music store from Archer City, Texas, which means he has “nexus” in Texas and is required to collect sales tax from Texas buyers. If Adam sells a synthesizer to a buyer in Denton, Texas, he’s required to charge that buyer sales tax. With the nature of how drop shipping functions, it’s almost guaranteed one party is functioning as a reseller.

• This means drop shippers must be aware of and comply with the sales tax laws and rates in the states where their customers reside.
• In the U.S., all sellers (whether retailers or drop shippers) are required to collect sales tax if they have sales tax nexus in the state to which the item ships.
• The retailer should be able to purchase items it sells exempt from sales tax under the resale exemption.
• To calculate sales tax for drop shipped items, you need to determine the sales tax rate of the destination state and any applicable local taxes.
• That means it’s important to know the rules for each state, not only to comply with the law, but also to avoid a situation where both you and the shipper charge sales tax to the customer.

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But let’s not get ahead of ourselves—there’s a lot more to unpack here. Drop Shipping and Sales Tax NexusFrom a sales tax perspective, each drop shipment consists of two sales. Also, Utah is one state with a special drop-shipment rule that allows for a non-nexus creating retailer to issue their home-state resale exempting certificate to a distributor in a drop shipment. There are several ways to establish sales tax nexus with a state, but Airbnb Accounting and Bookkeeping the two most common are through physical presence (physical nexus) or economic activity (economic nexus). For the most part, when a retailer buys a product from a supplier, that purchase is tax exempt because the product was bought for resale. So if the retailer does not have nexus in the state where the product is purchased, the supplier may be on the hook to collect and pay sales tax.