What is Drop Shipping?
Drop shipping is a retail fulfillment method where a store doesn’t keep products in stock but instead transfers customer orders and shipment details to a third party, usually a wholesaler or manufacturer.
Example of Drop Shipping
An online retailer lists products on their website but orders the items from a supplier only after a customer makes a purchase. The supplier then ships the product directly to the customer.
How To Calculate Sales Tax for Drop Shipping
- Determine the nexus (physical presence) for sales tax obligations.
- Apply the appropriate state and local tax rates to the sale.
- Special Tip: Keep updated with state-specific sales tax laws, as drop shipping can create nexus in multiple states.
- Advantages
- Offers a wide product selection without holding stock.
- Reduces inventory management costs.
- Disadvantages
- Lower profit margins compared to traditional retail.
- Less control over product quality and shipping times.
FAQs
Do drop shippers need to collect sales tax?
Yes, if they have nexus in the state where the sale is made.
How does drop shipping affect sales tax nexus?
Using third-party suppliers can create a nexus in states where the supplier operates.
Can drop shippers avoid sales tax?
No, they must comply with state tax laws where they have nexus.
What is a resale certificate?
A document that allows a retailer to purchase goods tax-free when the goods are intended for resale.
