Dropshipping sales tax INTIMIDATES tons of business owners. Thinking they’ll get in HUGE trouble if they mess up.
But as someone who’s been in the dropshipping business for a DECADE. It’s not as complicated as you think.
My legal team and I compiled this article to help YOU understand sales tax. I sprinkled several tips as well. MAXIMIZE your profits and reduce your expenses.
Make tax filing a no-brainer!
What is dropshipping sales tax?
It’s a tax the GOVERNMENT collects from drop shipping sellers. Whenever the ship-to-state has a sales tax nexus.
Well, the sales tax nexus is just a fancy way of saying…
The destination state is REQUIRED to collect sales tax. From every sale made in its jurisdiction.
States legally obligate every seller, retailer, and drop shipper to pay sales tax. However, the amount varies.
It relies on the sales tax rules of the destination state.
Some states charge a sales tax of 0%. While OTHERS charge over 10% per transaction.
Who pays sales tax?
Who PAYS the sales tax is not a black-or-white answer.
The tax obligations DEPEND on the three parties involved. Namely the supplier, drop shipping seller, and the buyer.
There are usually 2 possible scenarios when paying sales tax obligations. The first one is usually when the END CUSTOMER pays the sales tax. The second one? The third-party supplier charges the drop shipper.
Don’t worry. I’ll explain the two transactions.
Outcome 1: The customer’s orders include sales tax
This is the COMMON scenario. The retail price of the drop shipper already includes the sales tax. Or add it upon checkout. Hence, the tax is already accounted for when the customer hits purchase. The drop shipper then remits sales tax to the government.
Outcome 2: The supplier charges the sales tax
Let’s say the drop shipper lives in a state where his supplier has an economic nexus. In this scenario, the DROP SHIPPER must pay a tax rate for the wholesale price of its supplier. After all, the supplier is technically selling the product to the drop shipper.
Fun fact: Sometimes, there are TWO sales tax charges per dropshipping item. I’ll explain that below.
How does sales tax work?
Sales tax works just like OTHER taxes. Multiple states charge sales tax differently. But based on experience, here’s how the sales tax process works.
Step 1: Customers purchase items
Here’s the ACTION that jumpstarts everything. A customer buys from the drop shipper. The dropshipping retailer then orders from the supplier’s inventory.
Who pays the tax?
It depends on the next step!
Step 2: The sales tax is charged
As mentioned, there are TWO possible outcomes here:
- The drop shipping retailer charges the customer
- The supplier charges the drop shipper
In some cases, these 2 happen at the same time!
You may wonder: “How much is it?”
States have their own tax rate. In South Dakota, that’s 4.5% of the transaction’s selling price. In California, it’s 7.25%.
Step 3: The tax goes to the government
It’s remitting sales tax TIME. Every US retailer who has inventory goods sold must file their taxes. Sometimes it’s monthly. But other states are required to collect tax quarterly or annually.
How to handle your dropshipping sales taxes?
As a MASTER of drop shipping and sales. Let me share my top 3 tips for managing drop shipping sales tax. These WORKED for my two businesses.
Whether you’re selling in the same state. Or you DROPSHIP in a ship-to-state with economic nexus. You’re IN for a ride!
Tip 1: Get sales tax exemption certificates
Every time you BUY as a customer. You’ll be charged with sales tax.
Hence, more often than it should be…
Dropshipping sales get charged twice for the sales tax requirements. One is when the drop shipper buys from the supplier. And the OTHER when the drop shipment occurs from the drop shipper to the FINAL customer.
One word: waste of money.
How to avoid this?
Apply for a valid resale certificate! Think of it as a shipping and sales tax permit. Showing the government you’re a RETAILER.
Once you have resale certificates…
Suppliers won’t charge sales tax. You ENJOY the money-saving resale exemption exclusive for retailers and drop shippers.
Tip 2: Stay on top of tax laws
Laws are constantly changing. Keep up with the LATEST tax trends to save money and AVOID penalties.
Try SIGNING UP for newsletters or attending webinars. Whoever has KNOWLEDGE wins the game of business!
Tip 3: Source from Chinese wholesalers
US suppliers charge you with EXTRA TAX. But China wholesalers? Sweet, affordable prices for LITTLE TO NO tax markups!
Purchasing items will be MUCH MORE AFFORDABLE. You reduce taxes and overall expenses per retail sale.
We can Made Drop Shipping from China Easy
Leeline Sourcing is to help Shopify & small businesses sourcing products from China and build your branded business.
FAQs about Dropshipping Sales Tax
Do you have to pay taxes for dropshipping?
Yes. It’s calculated based on your retail selling price. In some cases, the government charges tax twice per customer order. One between the supplier and seller. And the other between the drop shipping and the customer.
Is there a sales tax on drop shipments to Texas?
Yes. Texas charges a 6.25% drop in shipping sales tax. Most states charge these taxes. After all, it’s one of the MAIN sources of the government’s money.
Can you sell on Shopify without collecting sales tax?
Shopify requires and helps you to sell while collecting sales tax. Fortunately, it won’t be MUCH problematic on your end. Shopify has AUTOMATIC tax-collection policies. This platform can also remit sales tax on your behalf.
Dropshipping sales tax is INEVITABLE. But you lower it significantly by preparing a resale certificate. Sourcing from China is also a game changer!
Do you need a sourcing agent from China?
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