![]() ![]() What is valid in the destination state will vary. In this scenario your vendor should be asking your company for a resale certificate that is valid in the destination state. Scenario 2: Your vendor has nexus in the destination state but your company does not. In this situation, the customer will be obligated to pay use tax to the destination state. In this case, your vendor does not have a legal obligation to obtain exemption certificates that are valid in the ship to state and your company does not have the legal obligation to charge sales tax to your customer (assuming they are the end user). Scenario 1: Neither your vendor nor your company has nexus in the destination state. ![]() For simplicity, these scenarios assume that each party to the drop shipment is located in a different state and that the goods are shipped from outside of the destination (i.e. If your company has nexus in the state where the drop shipment occurs, then your company will need to obtain an exemption certificate from your customer or your company will need to charge your customer sales tax on the retail cost of the property and any delivery charges that may be taxable. If your vendor has nexus in the state where the property is delivered to your customer, then some type of resale certificate must be provided by your company to your vendor to prevent your vendor from charging your company sales tax on the wholesale cost of the goods sold to you. As noted above, the first transaction involves the sale of the property from your vendor to your company. Of the two questions, the issue of nexus is vital to determining the responsibility each party has for sales tax in the destination state. Each of these sales tax decisions requires that two questions be answered: (1) do either of the sellers (your vendor and your company) have nexus in the destination state? and (2) is the sale to either customer a “sale for resale”? Why Sales Tax Nexus Matters With two separate sales occurring in a drop shipment transaction, there are two separate sales tax decisions that need to be made. ![]() It also presents a myriad of sales tax challenges that the states are willing to capitalize on whenever possible to make sure that taxes are paid by someone on these transactions. This all sounds very convenient and as an easy way to manage inventory and meet your customer needs in a timely fashion. Assuming that your customer is the end-user of the products sold, this second sale is a retail sale and is taxable as dictated by the laws of the state where your customer is located. This sale is documented by the sales proceeds you receive from your customer for the goods they purchase. That sale is between your company and your customer. There is a transfer of title from your vendor and your company at the moment the goods are delivered to your customer. Your vendor is billing you for the purchase price of the items your company has purchased and had delivered to your customer. This first sale is, most likely, a “sale for resale” from your vendor’s perspective. The first sale to occur is between your vendor and your company. In a traditional drop-shipment transaction, two separate sales occur simultaneously at the point the goods are delivered to your customer. What is Drop Shipping?Īs a refresher, this “ drop-shipment” relationship occurs when your vendor ships the product directly to your customer and bills your company for the purchase you made from them. Third-party drop shipments are becoming one of the most common ways that eCommerce companies use to fulfill their customer’s orders. Sales Tax 101: I’m in a Drop Shipping Relationship. ![]()
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