Sales Taxes and Dropshipping

What The Nexus Are You Talking About?

As convenient as the dropshipping business model is – no inventory to handle, no shipping headaches (well, most of the time), no brick and mortar store – it does not come without its challenges. One of those, and a pretty serious one at that, is how to handle sales tax as a dropshipper.

Dropshipping is mostly a three-way relationship – there is you as the dropshipper, there is your manufacturer/wholesaler as the supplier, and there is your customer as the buyer. Figuring out who actually pays the sales tax is what is headache-inducing in this situation. The issue of nexus is what is used to identify the ‘who pays’ part of the equation.

All parties involved in dropshipping have a physical location and are subject to the laws of their respective states, including tax laws. A nexus is a term used to signify having a presence in a state which makes an individual or business subject to that state's tax laws. Depending on the state, a mere physical presence does not necessarily constitute a nexus, unless that individual or business has registered to collect sales tax. Some states confer nexus status to a seller that makes a single sale, regardless of amount; others provide a threshold in total sales before a nexus is established. Also, when it comes to dropshipping, some states may confer nexus on you even if you’re only using the services of your dropshipper in their state.

Sounds pretty complicated? It gets even more so. When you are a dropshipper, you are technically a reseller and that should get you tax exempt so that you are not liable for sales tax towards your supplier. You need to obtain a resale certificate and provide your supplier with it; however, the procedure for obtaining it is not the same everywhere and it requires significant paperwork.

Figuring this tax stuff out is no mean feat and the best advice we can dish out at this point is to consult a professional. Internet abounds with useful articles such as this pretty detailed explanation on SaleHOO. However, these are just for guidance purposes, you need to investigate what pertains to your specific situation and abide by the rules or you may get a headache of the lifetime come tax time.