who pays sales tax on drop shipping

And, if you’re a non-resident living in a completely different country, there’s no nexus and reason to collect a sales tax. And there is a sales tax exemption for products bought for resale in the United States. However, you must apply for an official exemption certificate to take advantage of the exemption. As mentioned above, you may not have to pay sales tax on what you buy from your dropshipping suppliers because you are a reseller. Resale exemption certificate procedures vary from state to state. If you’re the seller, you’re generally required to collect sales tax only if you have nexus with the customer’s state.

When an end sale in the supply chain is reached, the retailer collects a sales tax. In other words, the final consumer pays a sales tax on the purchase of goods or services. When buying supplies or materials drop shipping sales tax to be resold, a business can issue a resale certificate to the seller and pay no sales tax. No sales tax is levied until the sale is made to the final consumer, and no tax is levied by the tax jurisdiction.

How Drop Shipping Complicates Sales and Use Tax

They could also affect Business to Business (B2B) imports and businesses that operate travel agency margin schemes and flat rate schemes. What’s the difference between sales tax and value-added tax (VAT)? Both sales tax and value-added tax are types of indirect taxes – a tax collected from the buyer by the seller at the time of purchase and then paid or remitted to the government on behalf of the buyer. Sales tax and VAT are common sources of confusion in the corporate-tax world.

Our first advice when it comes to dropshipping taxes in the USA is to check where you have nexus. You have to pay income taxes on every profit you make throughout the calendar year. The sales tax is calculated based on the tax rate of the state where you have a nexus.

🔹 Dropshipping taxes in the US

In these cases, the shipper may fulfill that obligation by collecting the sales tax from you, the seller. In order to avoid paying this tax, you may be required to produce an exemption certificate. The first sale to occur is between your vendor and your company.

When in doubt, invest in a professional tax advisor that specializes in eCommerce. Together, you can create a plan that helps you stay on the right side of tax laws. As a dropshipper, you can start a retail business with very little capital investment.

Customs or Duty Taxes

If the customer is located in Virginia, no matter how the sale is made, through traditional shipping or drop shipping, you are responsible for collecting sales tax, not the vendor. In the United States, sales tax is imposed on the final consumer. The retailer should be able to purchase items it sells exempt from sales tax under the resale exemption. The transaction between the seller and the customer is a retail transaction and taxed according to the nature of the goods purchased or the type of customer. The retail transaction is not between the manufacturer and the customer and therefore, the manufacturer should not be held liable to collect tax based on the retail price.

Our guide to navigating new tax regulations and drop shipping is a visual reference designed to help sellers and suppliers more easily determine who collects and remits sales tax. Of course, we highly recommend discussing your specific tax obligations with your tax professional. Of all of the taxes you’ll pay as a dropshipper, none are more complex than sales tax. But just because it’s complicated doesn’t mean it’s impossible to figure out.

You are actually a reseller that resells the products you buy from your supplier to the end consumer. Traditionally, every brick-and-mortar store is expected to pay taxes. Paying taxes is required for all businesses, including those operated online. This means that just because you have a dropshipping business doesn’t mean that you are exempted from paying dropshipping taxes.

So, if you do have nexus in multiple states, you’ll have to collect taxes from all your customers in those states. For instance, in some countries, you pay your income taxes yearly, while others might require quarterly or pay-as-you-go models that oblige you to pay taxes on each income you receive throughout the year. Sales taxes are collected from customers only if you have a nexus in one or multiple states (if you have a physical presence or go over the minimum thresholds). So, in this scenario, the sales tax you’d have to charge your NY customer is $2.

What Is a Sales Tax Nexus?

A similar concept exists in the EU, where each state has its own VAT rate – the EU equivalent of the US sales tax. But in case your dropshipping business is based outside of the European Union https://www.bookstime.com/articles/what-is-a-sales-invoice and you are sourcing your products from an EU supplier, you will not have to pay VAT. Vendors (in this case, dropshippers) serve as agents that collect the tax on the state’s behalf.