Distributors need to know what states accept what documentation. We highly recommend that you consult an accountant with experience with sales tax if you plan to embrace dropshipping in your eCommerce business model. Sometimes your small business takes an order for a product you don’t actually have in stock at your location. You might not even actually carry that item, nor have you ever carried that item. However, because you love your customers and want to cater to their needs, you ordered the item from a third party; maybe a wholesaler warehouse, or a manufacturer. Simply put, drop shipping is a fulfillment process in which sellers send orders to customers directly from a manufacturer or distributor, rather than keeping stock on hand.

— if the dropshipping supplier who delivers the order is located in the same state as the customer, then you might be on the hook for sales tax. To start collecting sales tax, you need to get a sales tax permit from the state. Every state is different, but you can Google, “[State name] sales tax certificate” to find the process to apply for a permit. Of all of the taxes you’ll pay as a dropshipper, none are more complex than sales tax. But just because it’s complicated doesn’t mean it’s impossible to figure out.

Sales Tax Exemption Certificates

Drop shipping seems simple until you start thinking about sales tax. Drop shipping creates a convoluted web of possible scenarios for who collects sales tax from whom, especially when the buyer, seller, and who pays sales tax on drop shipments drop shipper are spread across multiple states. It’s important to consider drop shipping when choosing sales tax software, if you currently participate in an drop-ship program or plan to in the future.

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. 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). Learn about the different types of sales tax nexus and how they’re applied in each state. The retailer receives the order request and payment from the customer. For any items not available on hand, the retailer places an order with the supplier.