What is Drop Shipping?
Dropshipping is a fulfillment method where the selling merchant does not stock or own inventory. When a customer buys a product, the seller purchases the item from a third party. The third party is usually a wholesaler or manufacturer who then ships the product directly to the customer. In dropshipping scenarios, the seller does not handle the product directly. This is a particularly popular form of e-commerce.
What is E-commerce?
E-commerce simply refers to the buying and selling of goods and services on the internet and the data transactions that constitute payment. Brick and mortar stores are no longer the go-to for shopping as more people are going online for their retail needs.
How much money is in E-commerce?
Online shopping has been around for over 25 years and is expected to grow into a 4 trillion dollar industry. It is by far the fastest-growing retail market.
Dropshipping Can Make Sales Tax Complicated
Dropshipping is a new and innovative way of doing business. This is very exciting but also comes with unique operational challenges. This is particularly true when it comes to figuring out relatively simple things like sales tax.
In a traditional brick-and-mortar sales environment, sales tax is rather straightforward. Customers are usually making purchases from their stores and the retailer collects the sales tax from these purchases at the checkout. This is all happening in the same state in one location, so there is little confusion.
With drop shipping, the retailer could be in Kansas, while the order is forwarded to a supplier in Delaware and then shipped to a customer in Tennessee. This makes it confusing about who charges the sales tax and to exactly what state sales tax is owed.
Nexus
Nexus is defined as having a presence or a significant connection to a state. Your sales tax obligations can change significantly depending on the state. Most of the time, however, a mere economic connection to a state is enough to create nexus.
State connections include:
- Having offices in the state
- Warehouses and distributors located in the state
- Employees
- Affiliates located in the state
- Making a certain amount of money or transactions in a state
- Doing physical business in a state for some time
Nexus Can Change Depending On The State
Nexus requirements for dropshipping can vary greatly depending on the state.
In the following states, nexus is created just by any drop shipping connection:
- Texas
- Florida
- California
- New York
In other states, dropshipping nexus is created by spending a minimum amount of dollars.
Tax Scenarios For Drop Shipping
Neither the retailers nor the suppliers have nexus:
- Retailers and suppliers are generally not required to collect sales tax.
- The customer is required to pay use tax on the purchase (unless it is tax-exempt).
Nexus for the retailer but not the supplier:
- The retailer must collect sales tax from the customer.
The supplier has nexus but not the retailer:
- The supplier might be responsible for collecting either sales tax or proper documentation (such as a resale certificate) from the retailer.
- The sales tax might be taken from the wholesale price or subject to a predetermined formula if the exact price is unknown.
The Various State Tax Laws Can Be Confusing
Dropshippers must understand that each state has its own unique tax laws related to retail sales tax that are constantly changing. There are many different definitions of what is nexus and what manner of tax resale certificates are acceptable. Some states accept resale documentation from other states, while many do not.
Third-party fulfillment companies make this even more difficult to comprehend. A large company like Amazon can have one shipment travel through a dozen states, which can often trigger nexus.
Do Not Be Caught Unaware
Many dropshipping third party suppliers are being unpleasantly surprised by large fines and hefty audits. This has made them require retailers to pay sales tax or be able to present valid tax resale certificates. However, the type of documentation required for each state can vary greatly.
Do Not Get Frustrated.
We understand that this is a whirlwind of information that can be very frustrating. There are great differences between states and you do not have the time to sort out this out and properly run your business. That is why TaxResaleCertificate should do all the hard work for you. We can make sure that you get all the advantages of a tax resale certificate without having to deal with the hassle of government red tape. Let us handle the hard stuff so you can proceed to run your business with confidence. Make sure you check out our second blog in this series so you can learn even more valuable information about tax resale certificates.
What is A Tax Resale Certificate?
It is critical that you understand that tax resale certificates can also be used on items that will be resold. Office supplies, such as new computers for your employees, would not fall under the category of retail. It would be considered fraud not to pay sales tax on these items.
If this is confusing for you, just think of tax resale certificates as state tax exemption certificates. Some states actually call them exemption certificates or reseller’s permits.
That Is Why We Are Here To Help
It is understandable that all this information can be very daunting. Not correctly understanding sales tax and the benefits of a tax resale certificate can lead to a great deal of trouble. A retailer could lose out on extremely beneficial sales tax exemption status. A savvy business owner will understand that having a tax resale certificate will save them a good deal of money but leave the actual headache of registration to someone else.
On the other hand, misunderstanding and not paying the correct sales tax to a state government could very much hurt a business’s standing and reputation. At Tax Resale Certificate, we make the process as easy as possible. Just take advantage of our user-friendly interface to help take the headache of applying for a tax resale certificate off your plate.
We provide a tax resale certificate for the top states that include:
- California
- Texas
- Massachusets
- New York
- New Jersey
- Illinois
- Florida
Let us handle the hassle so you can go about the important work of leading your retail business to great success.