Guide to Dropshipping Sales Tax

In the fast-paced world of e-commerce, dropshipping has become the secret weapon for sellers looking to scale without the weight of inventory. It’s a modern twist on retail that has changed how products move—and how taxes apply to those sales.

In this post, we’ve compiled all of our experience to explain the lay of the land: the general rules around sales tax for drop shipments, plus how to comply with tax rules in major world markets.

Let’s dive in!

What is dropshipping?

Dropshipping is an e-commerce technique that allows online entrepreneurs to sell products from their business, without ever owning or storing the product themselves.

Instead, once a customer buys the product, the business owner orders it from a third-party supplier, usually either a wholesaler or a manufacturer. The third-party supplier then fills the order and ships it straight to the customer. The third party is the dropshipper.

The allure of the dropshipping model is that entrepreneurs can start an online business without investing much money up front (e.g. buying all their inventory) and without a ton of overhead costs (e.g. renting storage space).

Dropshipping sales tax

Dropshipping in the United States

Surprise! There’s no clear answer… But we’ll lay out the general scenarios you encounter, when purchasing from a dropshipper and when selling to a customer. We’ll also advise you on how to double-check your particular tax status.

Do you need to pay sales tax to your dropship suppliers?

This is a tricky step. Usually you do not need to pay sales tax on the orders you make from your suppliers. That’s because there’s usually a sales tax exemption for purchases intended for resale. BUT to take advantage of this exemption, your business needs an official exemption certificate.

Sales Tax Exemption Certificates in dropshipping

Also referred to as resale certificates. The rules for these certificates vary by state. Some states only accept in-state issued certificates, while others accept multi state certificates.

• Multistate Tax Commission: One blanket sales tax exemption certificate accepted by 38 states.
• Streamlined Sales and Use Tax Agreement: If you’re registered for tax via the SSUTA, then that single Streamlined exemption certificate is accepted in every Streamlined member state.

When you make your purchase from the supplier, you need to provide them your complete exemption certificate. Then the supplier won’t charge you sales tax. But not all suppliers accept resale certificates, because they want to discourage resellers from buying their stock! So be sure to check.

Do you need to charge sales tax as a dropshipper?

This B2C part is a bit more straightforward.

• If you have sales tax nexus in a state… Then you must register for sales there. Then you must collect and remit sales tax in all states where you’re registered. It gets confusing with dropshipping. Some states tax the full retail price of the transaction, and other states only require taxing the wholesale price.
• If you don’t have nexus in a state… That usually means you’re exempt for charging and remitting sales tax. But — there’s always a but! — if the dropshipper who delivers the order is located in the same state as the customer, then you might be on the hook for sales tax. Some states consider an in-state supplier to qualify as a nexus for that sale. California, New York, Texas, and Florida have particular clauses about this scenario.

Always check each state’s tax policy to make sure you’re staying within the rules. Here’s a list of each state’s revenue department website.

Side note: This doesn’t apply to you as the retailer, but there are special clauses for dropshippers, too. If the supplier has nexus in the state, but you don’t, then they might be responsible for collecting sales tax. These states include California, Connecticut, Florida, Hawaii, and others.

For a full explanation of how to comply with US sales tax, check out what you need to know about sales tax in the US

Dropshipping in the US: explanation 101

In our experience, it’s helpful to take all of those sales tax rules and reframe them in a “real life” scenario that you can relate to as a business owner. So now we’ll explain the sales tax dropshipping stuff in an example scenario between a buyer, a retailer (you!), and a supplier. There are three parts to this… let’s get started!

Imagine that Rebecca Retailer sells a hat to Bella Buyer. Rebecca doesn’t have the hat in stock, so she orders the hat from Dan Dropshipper, and has Dan send the hat to Bella directly.

In this case, Rebecca Retailer pays Dan Dropshipper for the hat, and Bella Buyer pays Rebecca.

Two sales, but who charges tax? Well, it can work out in a few different ways.

Scenario 1: Rebecca Retailer collects the sales tax from Bella Buyer.

Bella Buyer is located in a state where Rebecca Retailer has sales tax nexus. In this case, Rebecca is required to collect sales tax from Bella. If Rebecca _doesn’t _have sales tax nexus in Bella’s ship-to state, then she doesn’t have to collect sales tax from her.

Scenario 2: Dan Dropshipper collects the sales tax from Rebecca Retailer.

However, Dan Dropshipper may have sales tax nexus in the state where Bella is located. Since Dan is dropshipping the hat to Bella at her ship-to address, Dan is required to charge sales tax from the middleman, Rebecca Retailer.

Scenario 3: Rebecca Retailer provides Dan Dropshipper with a Resale Certificate.

Here, Rebecca shows Dan that she’s also a retailer who plans to resell the hat, and so Dan doesn’t need to charge sales tax to her. In this scenario, Dan does not collect sales tax from Rebecca, even if Dan has sales tax nexus in the state where Bella Buyer is located.

Note: In some cases, both Dan Dropshipper and Rebecca Retailer will be responsible for collecting sales tax!

Dropshipping in the European Union

Do you need to pay VAT to your suppliers?

If you are an EU VAT-registered business, and your supplier is also in the EU, then VAT on these B2B purchases is managed through the reverse-charge mechanism. If your business is located outside of the EU, but your supplier is inside the EU, then you probably don’t have to pay VAT.

Do you need to charge VAT as a dropshipper?

• If your business is located in the EU… Then you must charge VAT on each EU sale. But the tax rate depends on how much you sell annually. There are “distance selling thresholds,” which dictate whether you charge the tax rate of your home country or the customer’s country.
• If your business is located outside the EU… Then you must register for EU VAT and begin charging tax once you surpass the thresholds mentioned above.

If you remain _below _the thresholds and _never _register for VAT, then you run the risk of unhappy customers. If your goods are being imported from outside the EU, then upon delivery, the customer might end up paying some surprise VAT and import duties. Such unexpected costs make for poor reviews!

For the best customer experience and a consistent sales tax process across all EU member states, follow the rules for distance selling in the EU. Here you’ll also learn everything you need to know about the distance selling thresholds.

How to comply with dropshipping tax regulations

The best way to comply with dropshipping tax regulations is to use a cloud-based tool that automates the entire process, from charging the correct tax rate to collecting payment to issuing the proper invoice. All of your records are kept safely online for you, even if your computer crashes.

Quaderno is a tax compliance software that’s built to keep your dropshipping business tax-compliant as you grow — no matter where you sell. We built a tax database that serves sales tax, VAT and GST in countries all over the world.

In fact, Quaderno does all of the following:

• Notify you when you’re about to exceed a sales threshold in any state or country.
• Calculate the right amount of tax to charge each customer, right on your checkout page.
• Create and send invoices in multiple languages and currencies.
• Send tax invoices automatically.
• Provide easy-to-read tax reports for easy filing.
• Store secure records of all your transactions.
• Alert you when tax policies or tax rates change so that you’re always in the loop.

Start a risk-free trial today. No credit card, no obligation. Just a quick setup, and you’ll see how Quaderno can give hours back to your week.