Using drop shippers can greatly simplify logistics management and help create a competitive advantage for some businesses. However, it can also seriously complicate sales tax obligations. No matter which part of the triangle you fall on, understanding the sales tax implications can be tricky.
So the question remains, who collects and remits the sales tax? The retailer? The drop shipper? Or is it the customer? Figuring out the answer is not easy. To find the answer, first we have to look at the location and nexus for all players involved.
Here are a few questions to help drop shippers, wholesalers, manufacturers and retailers determine when and where sales tax is owed:
1) Does the retailer have nexus in the state where the sale occurs? If yes, the retailer collects sales tax from the customer, even if the retailer uses a drop shipper to deliver the goods.
2) If the retailer doesn’t have nexus in the state where the sale occurred, does the drop shipper? If yes, depending on the state the drop shipper could be responsible for collecting sales tax.
3) What if both the retailer and drop shipper do not have nexus where the sale occurs? The customer is subject to use tax unless the transaction is tax-exempt.
4) Do states consider drop shipping a nexus-creating activity? In some states, such as CA, NY, TX and FL, if a drop shipper delivers goods on behalf of a remote seller, that seller could be obligated to collect sales tax. How’s that for confusing?
As you can see, the sales tax obligations of drop shipping are complicated! With so many moving pieces, the obligations can shift from transaction to transaction. Given the complexity of the situation many manufacturers, wholesalers, retailers and drop shippers need sales tax assistance.
To find out more about sales tax and drop shipping download this whitepaper, “The Sales Tax Implications of Drop Shipping.”