Dropshipping and Sales Tax: Who Collects, Who Pays?
Due to the simplicity and versatility with which entrepreneurs can begin and operate their online company, the dropshipping model is standard. But concerning one ever-complicated facet of e-Commerce, the model will run into the tricky territory: sales taxes!
The general sales tax rules for drop shipments will be clarified in this article, including how to comply with tax rules in major world markets.
What is dropshipping?
Dropshipping is an e-Commerce process that enables internet entrepreneurs to market their company’s goods without even buying or storing the commodity themselves.
Instead, the company owner purchases it from a third-party retailer, usually either a wholesaler or a producer, until a buyer buys the product. The third-party seller then finishes the order and delivers it directly to the client. A dropshipper is the third party.
The allure of the dropshipping model is that without spending a lot of money upfront (e.g., buying their entire inventory) and without operating expenses (e.g., renting warehouse space), entrepreneurs can launch an online business.
However, there will be problems, and taxes are one of the major ones. There are two sales at play for one product: the buyer purchases from the vendor, then the supplier’s retailer. So where, and from whom, the sale is tax paid and collected?
A short debrief on sales tax, first.
What is sales tax, VAT, and GST?
Consumption tax forms are income tax, VAT, and GST. The buying of goods and services is subject to consumption taxes, and each nation decides which type to use. It may be a flat fee or a percentage of the overall value-added to any purchase. Every form demands something different from you, the owner of the firm.
But one aspect stays the same all the time. The final user pays the fee since they directly use the end product. So it’s a consumption tax. On buying and saving and personal use on one’s own.
The biggest problem with dropshipping is the dilemma of who receives the final customer’s consumption fee. Is it you who delivers the order, the retailer, or the dropshipper?
Who collects sales tax, you or the supplier?
In the United States
Surprise! There’s no straightforward solution… So we’re going to set out the general situations you face when buying from a dropshipper and selling to a buyer. Also, we will instruct you on how to double-check your special tax status.
Do you need to pay sales tax to your suppliers?
This move is a tricky one. You typically may not have to pay sales tax on the orders from your vendors that you make. That is because there is an exemption from sales tax for transactions meant for resale. BUT the company requires an official certificate of exemption to take advantage of this exemption.
Sales Tax Exemption Certificates
They are also known as resale certificates. The regulations for these certificates differ according to the jurisdiction. Only in-state certificates are accepted by some jurisdictions, while others accept multistate certificates.
- Multistate Tax Commission: One blanket certificate of sales tax exemption recognized by 38 states.
- Streamlined Sales and Use Tax Agreement: If you are enrolled with the SSUTA for tax, every Streamlined Member State recognizes the one Streamlined Exemption Certificate.
You need to supply them with your full exemption certificate before you make your order from the retailer. Then you will not be paid sales tax by the supplier.
Do you need to charge sales tax from your customers?
This part of B2C is a little clearer.
If you have sales tax nexus in a state…
You then have to pay for the purchases there. In all states where you’re enrolled, you must then raise and remit sales tax. This is getting complicated with dropshipping. The purchase’s full retail price is charged by some jurisdictions, and some states consider the wholesale price to be taxed.
If you don’t have nexus in a state…
That typically means that you are excluded from sales tax charges and remittances. But—it still has a but! If the dropshipper carrying the order is based in the same state as the buyer, so you could be on the sales tax hook. To count as a nexus for the transaction, some states consider an in-state retailer. There are unique clauses about this situation in California, New York, Texas, and Florida.
Often review the tax policies of each state and ensure that you remain within the laws. Here’s a list on the website of each state’s revenue agency.
Side note: This does not refer to you as the dealer, but for dropshippers, too, there are specific provisions. If the state’s supplier has a nexus, but you don’t, they will be responsible for collecting sales tax. California, Connecticut, Florida, Hawaii and others are among these states.
Check out what you need to do about sales tax in the US for a full explanation of how to deal with US sales tax.
In the European Union
Do you need to pay VAT to your suppliers?
If you are an EU VAT-registered entity and the provider is already in the EU, so the reverse charge system is used to handle the VAT on these B2B transactions. If your organization is based outside the EU, but your provider is located within the EU, so you do not have to pay VAT.
Do you need to charge sales tax from your customers?
If the organization is based in the EU…
You must then charge VAT for each EU sale. Although based on how much you sell annually, the tax rate varies. There are “thresholds for distance transactions,” which determine whether you bill your home country’s tax rate or the country of the consumer.
If your business is located outside the EU…
Then you must apply for EU VAT and if you meet the thresholds listed above, start charging tax.
You run the risk of disgruntled consumers if you sit below the caps and never file for VAT. If the products are imported from outside the EU, the consumer can pay any surprise VAT and import duties upon arrival. For mediocre ratings, such unforeseen costs render!
Respect the guidelines for distance selling in the EU for the highest consumer service and a transparent sales tax mechanism across all EU member states. All you need to know about distance sale thresholds can also be learned here.