How Does Dropshipper Sales Tax Work?

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How Does Dropshipper Sales Tax Work?

Author: Christopher Stout
Published on: 12/18/20 5:02 PM

Whether or not dropshipping sales tax applies to your business depends on whether your wholesaler is required to collect sales tax from you. If they are, then you may want to register for a resale certificate in that state to avoid having to pay the tax. However, that may require collecting tax from your customer.

Need Help Determining Your Sales Tax Nexus?

Who Pays the Sales Tax? The Buyer or the Seller?

While dropshipping sales tax seems complicated, it’s easier if you think of it in terms of the buyer and the seller. If the seller has nexus, it then has a duty to collect the sales tax from the buyer. As a dropshipper, you are both a buyer and a seller.

First, as a seller, you have an item that a buyer wants so they purchase it. If you have nexus in the state, you have a duty to collect. 

Second, as a buyer, the seller sells you the item that your customer wants. Then, the seller ships it to your customer. If the seller has nexus in that state, it has a duty to collect. Sales tax is then paid by the buyer and collected by the seller.

How Does Drop Shipping and Sales Tax Work?

Before understanding how dropshipping sales tax works, you may ask the question, “Do I have to collect sales tax online?” The answer is yes, you may be required to collect ecommerce sales tax – meaning sales tax for online sales. Whether it’s referred to as an ecommerce sales tax, online sales tax, or internet sales tax, you may be obligated to be charging sales taxes to your customers.

Since a dropshipper is both the seller and the buyer, dropshipper sales tax becomes a bit more complicated. As a buyer, you are considered a reselIer since you are purchasing items from a seller, and then selling it to your customer. Normally, as a buyer, you purchase goods from the seller, and then the seller ships them to you, usually to a warehouse or third party. Then when the sale of goods happens between you and a customer, the item is shipped from the location where it is stored.

Dropshipper sales tax rules require the seller to collect the tax if it has nexus, and the buyer pays it. However, dropshipping works differently than normal. Although the seller may keep the items you purchase onsite to be shipped later, it can only be done on a demand basis. Your customer purchases an item, you then purchase the item from the wholesaler, who then ships it to your customer. 

If you and your wholesaler have nexus, then each of you are required to collect sales tax. Unless you have a reseller permit, you will have to pay the tax to the wholesaler. To learn more about nexus, click here.

Do You Need a Reseller Permit to Do Dropshipping?

It’s not necessary to have a reseller permit if you do not have nexus in a state. However, the seller may have nexus in the state in which goods are being sent. In that case dropshipper sales tax applies and the seller would collect from you. Whether you want (or need) a reseller permit depends on a few factors that we’ll discuss in the next section.

How do Dropshippers Deal with Taxes?

Dropshipper sales tax involves you making a crucial decision about whether to pay sales tax to your supplier or not. To be exempt from paying the sales tax, you would need a resellers permit. Assuming you do not have nexus in the state where your customer is, applying for a resellers permit, may obligate you to collect the tax from your customer. 

Usually, the reseller’s permit is just the general sales tax license or permit in the state. Some states may allow you to apply for the reseller’s permit and may allow you to claim your sales as exempt since you do not have nexus.

If you do not apply for a resellers permit, then you’ll have to pay the dropshipper sales tax. Additionally, paying the sales tax does not relieve you of the responsibility of collecting it from the customer, if you have nexus. 

Generally, the threshold for having to register to collect sales tax involves meeting sales or transaction levels or having a physical connection to the state. It may be more of cost/benefit to pay sales tax to the wholesaler until you reach these thresholds. It may cost more to keep track of purchases and file returns than paying the tax.

Do I need to have an EIN to start Dropshipping?

When dealing with dropshipping sales tax, in order to register for a resellers permit, you will need to use an identification number. If your company is organized as an LLC or corporation, you will need an EIN. If you are a sole proprietor, you would use your social security number. Foreign entities or individuals without a physical US location can also obtain an EIN. 

Need help obtaining an EIN?

Do you need a Business License to Drop Ship?

To obtain a reseller permit or sales tax license for dropshipping sales tax, it’s usually not necessary to have a business license. However, your local city or county may require one if you are operating a business out of your home. Additionally, in some areas, operating a business out of your home is prohibited. You will need one to operate out of a commercial building.

What Taxes and Fees do Dropshippers Have to Pay?

Dropshipper sales tax isn’t the only tax a dropshipper may have to pay. Tax on income must be considered in your home state. Additionally, as your business grows other states may need to be considered. Also, if you want to protect a trademark or business name in various states, you will need to apply with the Secretary of State or other business division which may incur additional reports and fees either one-time or on an annual basis. 

Finally, some states require registration fees to be paid when applying for a sales tax license or reseller permit.

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