Drop Shipments and Flash Title: Establishing Sales Tax Nexus in Complex Commercial Transactions
This reference is here to help answer your questions about what is and is not subject to the North Carolina sales tax. The resale certificate provided to the true retailer will be accepted as proof that the sale was for resale. You must obtain a valid California resale certificate from the customer and keep it in your records. By following these best practices, you can focus on growing your dropshipping business while staying compliant with US tax laws.
What is sales tax nexus?
By following these best practices, eCommerce businesses involved in drop shipping can effectively manage their sales tax obligations and ensure compliance with the ever-evolving regulations. Keeping abreast of the latest sales tax laws is vital for any eCommerce business engaged in drop shipping. Moreover, they will be familiar with the fundamentals of sales tax, such as when it applies to drop shipping, and will guarantee that retailers remain in compliance with the current rules and regulations. By understanding location-based sales tax rates, drop shipping businesses can better navigate the complex world of sales tax and avoid potential tax liabilities. These tools can help determine the correct sales tax rates based on the location of various entities involved in a drop shipping transaction, such as the buyer, seller, and warehouse.
Customer Stories
Delivery charges (including but not limited to transportation, shipping, postage, handling, crating, or packing) are excluded from the sales price in Utah. If the sale is taxable, the delivery is taxable; if the sale is exempt, the delivery is exempt. Delivery charges billed by a seller are part of the sales price in Tennessee regardless of whether they’re separately stated on the invoice. Shipping and handling charges included in the selling price of taxable tangible personal property are taxable. Separately stated shipping and handling charges are exempt in Oklahoma, whether the contents of the package are taxable or exempt.
✔️ Use resale certificates to avoid being taxed by suppliers ✔️ Register for sales tax permits in those states Dropshippers often make costly mistakes when handling sales tax. • Obtain a resale certificate from the state’s tax authority. In New Mexico, services are taxable unless they are specifically exempted from taxation. This reference is here to help answer your questions about what is and is not subject to the New Mexico sales tax.
Connecticut State
In many cases, states will even accept forms of alternative documentation proving that the distributor qualifies for a sales tax exemption. Even products that are normally tax-exempt can now be liable for sales tax. However, this practice complicates how a business must handle its sales tax obligations. Several examples of exceptions to this tax are liquor, and some things specifically intended for resale.This means that someone in the state of Hawaii who sells school supplies would most likely be required to general excise tax, but an individual who sells liquor products might not be required to charge sales tax. In California, sales tax applies to either the retail price or the wholesale price plus 10 percent.
Texas sellers are engaged in business if they have a physical Texas location or make online sales in Texas. “Taxable items” include all tangible personal property as well as taxable services. You can take a credit toward the Texas use tax owed if you paid sales tax to another state. Remitting use tax protects in-state Texas retailers against unfair competition from out-of-state sellers that may not collect Texas tax. Online buyers must pay sales and use tax on taxable items delivered or brought into Texas.
Business Taxes Law Guide—Revision 2026
Even though the shipper is the one to accept a home state certificate from the seller, it is not the shipper’s obligation to monitor or dictate whether that seller must register in a state. This misconception stems from growing registration requirements of sellers and potential overstepping of shippers making assumptions about sellers’ nexus obligations. Shippers can still accept home state certificates from sellers for 30+ states after Wayfair. Many companies are registered in more states as a result of the Wayfair decision and may be unfamiliar with the drop shipment rules in those states.
Nexus and Its Implications
- These certificates are documentation that allows tax-exempt transactions for specific reasons under state law.
- (3) A person can also overcome the presumption by accepting a timely and valid resale certificate in good faith that contains all the essential elements as provided by Regulation 1668 from the person in California to whom the property is delivered.
- Drop shipping is a popular e-commerce business model where a retailer doesn’t keep inventory, instead relying on a third-party supplier or manufacturer to ship the products directly to the customer.
- ✔️ Register for sales tax permits in those states
- (Transaction two.) And lastly, the supplier drop ships the packaged goods to the customer.
A combined charge for shipping and handling services may be taxed differently from separate charges. Essentially, all items being shipped in this state, taxable or not, will have handling and shipping charges which are usually considered to be taxable. This reference is here to help answer your questions about what is and is not subject to the Wyoming sales tax. This reference is here to help answer your questions about what is and is not subject to the Nevada sales tax. Sales and use tax nexus standards with regard to drop shipments and flash title are unclear and can vary from state to state.
Working with Third-Party Vendors
When a business has nexus in a state, they are required to collect sales tax from customers in that state, which can depend on various factors like the location of the seller, the buyer, and the third-party drop shipper. A retailer that has sales tax nexus with the state where delivery takes place must comply with all applicable sales and use tax laws, including charging tax on shipping costs if they’re taxable in that state. If a shipment contains both taxable and exempt goods, tax applies to the percentage of the delivery charges due on the taxable goods (determined by sales price or weight). If the delivery charge is one lump sum for both taxable and exempt products, sales tax on shipping and delivery charges should be allocated based on either the percentage or weight of taxable goods.
- Many states are handling sales and use tax audits much more aggressively than they have in years past.
- A retailer that has sales tax nexus with the state where delivery takes place must comply with all applicable sales and use tax laws, including charging tax on shipping costs if they’re taxable in that state.
- Report no business activity
- The Court ruled that Illinois could not force Bellas Hess to collect sales tax on sales to Illinois residents because Bellas Hess had no offices, outlets, tangible property, salespersons, or any other type of physical presence in Illinois.
Sales tax rates vary by state and often by the type of product or service being sold.
Drop shipping, as an eCommerce business model, involves intricacies in sales tax management due to the supply chain complexities involving sellers, retailers, and drop shippers operating across various states. Understanding each state’s sales tax rates and nexus rules is essential for sellers involved in drop shipping. When it comes to drop shipping, the retailer must account for sales tax and be aware of the tax implications in each state where they have a nexus.
If Chair Maker has nexus with Washington, Chair Maker owes wholesaling business and occupation (B&O) tax on the drop shipment delivered to the customer in Washington. Therefore, Chair Maker is not required to collect retail sales tax on the sale, even if Chair Maker delivers the goods to Furniture Four’s customer in Washington. 90-minute on-demand webinar teaching how to correctly drop shipping and sales tax manage sales tax for drop shipments in light of changes created by the South Dakota v. Wayfair decision and what you can do to mitigate your audit risk.
In general, if you have nexus in a state, you are likely the one collecting sales tax. Determining whether you owe sales tax is always challenging, because you have to track where your business has nexus. If the sale is not taxable, your obligation is to obtain a valid resale certificate from your customer.
The physical presence requirement for sales and use tax nexus or the potential agency analysis for attributional nexus have not been fully examined at this point. Although the income tax holdings may be beneficial in trying to predict how states will treat flash title transactions for sales and use tax nexus purposes, they are not directly on point and as a result can be used only as guidance. Indiana ruled that the seller held inventory in Indiana for the moment that the seller held flash title to products sold to in-state customers and that the activities of the manufacturer with respect to the sales to in-state customers was sufficient to take the seller out of the protections of P.L. Although not on point, such rulings may help taxpayers determine whether such transactions will create sales and use tax nexus in the related states. While flash title transactions have not been examined by courts with regard to sales and use tax nexus, several states have decided whether a flash title or similar transaction creates nexus for corporate income tax purposes.
Instead, to fulfill orders, the seller buys inventory as required from a third party—typically a wholesaler or manufacturer. Customers are generally responsible for paying import duties, taxes, and fees upon delivery. Import taxes may be applicable to drop shipped products from overseas suppliers, depending on the destination country and the value of the goods being imported.
They help businesses devise strategies to ensure accurate sales tax collection during transactions and facilitate smooth reporting when filing tax returns. Integrating tax automation tools like Avalara or TaxJar and managing exemption certificates will contribute to a streamlined and accurate sales tax process. Retailers are primarily responsible for collecting sales taxes, while third-party vendors should be aware of their obligations, especially when they have a presence in the customer’s state. Tax implications can become complicated when working with third-party vendors in drop shipping businesses, since they handle shipments and deliveries to end customers. They provide guidelines and resources to help businesses understand their tax obligations and navigate the complexities of interstate sales tax collection.
