Everything You Need to Know About Sales Tax for Dropshipping

hi this is christine from ledger crews i hope you're all doing well do you use a drop shipper in your business or are you a drop shipper and wondering about what to do with sales tax where you have nexus and where you should collect resale certificates so you don't have to pay taxes on part of your transactions um if you have any of those questions you should watch till the end of the video because i'm gonna answer all of them but before i dive into the content if you haven't please subscribe to our channel and hit the bell button so every time we publish a new video you will get notified [Music] here at leger gurus we have mostly ecommerce clients and some of them use drop shippers and some some of them are dropshippers themselves so we see this a lot and we advise them on what to do with sales tax so i'm really excited to share this knowledge with you today and i'm gonna use a whiteboard because for some people it's hard to understand and it took me a while to understand this as well so i want to draw it out and make it a very easy understandable scenario uh for you so you understand the sales tax complicates okay so the first question is let's talk about these three parties that are involved in a drop shipping scenario the first one is the customer so the customer places an order to the seller the seller doesn't hold inventory they use a drop shipper so they in turn order the products from a dropshipper the dropshipper will actually deliver the product to the customer so from the customers perspective they only deal with the seller the seller has to deal with both the customers and the drop shipper because they essentially place an order from the drop shipper and then the drop shipper delivers the product to the consumer the customer has no idea about the drop shipper they simply go to the seller's website places an order and then they get a product delivered from another party so let me give you an example so i shop online a lot and i buy a lot of clothing so um one boutique store that i shop with they are using a drop shipper so the clothing store i shop with is located in california so the seller is located in california and me as the consumer i'm in utah i places an order on the seller's website they send me an invoice i pay the invoice and they turn around and place an order with their dropshipper that's actually located in utah as well and the dropshipper will send the seller invoice and have them pay the invoice and then they deliver the product to me from utah to utah so when i get my packages sometimes i'm wondering i thought i was shopping with a california company but how come my package is saying that it's delivered from linden utah instead of you know somewhere in southern california and then i realized they're using a drop shipper and this happens a lot more than normal customers knows but drop shipping is very popular and it involves three parties and the customer deals with the seller the seller deals with both the drop shipper and the customer and the drop shipper delivers the product to the customer and sends the seller an invoice okay so now we got all those three parties straightened out so there essentially is two transactions right so the first transaction when it comes to sales so the first transaction is between customer and the seller so that's the first transaction and the second transaction is between the seller and the drop shipper because the seller is essentially buying the product from the drop shipper and then the delivery happens which is the third step is between the drop shipper to the customer so now let's talk about where these three parties have nexus so we'll start with the simple one customers they pay sales tax so we're not worrying about them collecting sales tax so we're not going to worry about customers nexus we're going to talk about sellers nexus so if you are an online seller that use a dropshipper to deliver products to your customers you will have nexus in first of all your home state where you have physical presence so this would be where your home state is and secondly you need to worry about economic next so where you have physical presence is going to be your home state and any of your employees whichever state they reside in and the second one is economic nexus and this economic nexus is solely created by your customers so do not worry about where your drop shippers have nexus only worry about where your customers are creating economic nexus for you meaning if you have a lot of customers that are placing orders in various states over the economic nexus threshold um like over the 200 transactions or a hundred thousand dollars threshold then those customers create nexus for you let's go back to my example i'm going to write down the example here to mirror what we talked about we'll just talk about my experience with drop shipping so the seller is in california so obviously she will have physical presence in california where she has economic nexus determined by the customers so i'm in utah but if she doesn't sell enough to utah that passes the economic nexus threshold from utah so utah is 200 transactions or a hundred thousand dollar value so if she only sells let's say she only sells to me i'm her only utah customer then she doesn't have nexus in utah because she doesn't pass the economic nexus threshold then she shouldn't charge utah tax so she shouldn't charge me tax when i place this in order because par as the seller does not have nexus in this state so then let's talk about the second transaction between the drop shipper and the seller in this scenario it's almost like the drop shipper is the seller to the seller because the seller will send the order to the drop shipper and the drop shipper will send the seller invoice so when the dropshipper is sending the invoice to the seller they will charge sales tax and where they have nexus so where does the dropshipper have nexus first of all the dropshipper will have nexus where they have physical presence so wherever their warehouse is located if they use a company-owned vehicle instead of a common carrier to deliver products that will incur physical presence as well so they have nexus in where they have physical presence first and second they have nexus in where they have economic nexus and this is a big issue because dropshippers like printful they deliver so many products to all kinds of business owners one dropshipper can have multiple sellers and if they aggregate their sales to all the sellers and allocate it based on where the customers are where they're delivering to they might have economic nexus in so many different states and this is why most of the time drop shippers will charge seller sales tax on this invoice because the drop shipper either have physical presence or have economic nexus in where they're delivering to and because so many dropshippers delivered to all over the country for so many sellers on the aggregate level the drop shipper have passed economic nexus in those states let me know if that's confusing and i'm happy to explain more in the comments but what we see most of the time is seller only have physical presence in their home state have economic nexus when they sell a lot into other states dropshipper they have physical presence either through where they have stores warehouses employees or through their delivery if they use a company owned delivery vehicle into other states that's considered physical presence or if they deliver a lot of products for different sellers and then on an aggregate level they pass economic nexus threshold and they will have to charge tax on their invoice to the seller okay let me know if you have questions i know this is not the easiest concept to grasp and it really took me a while to understand all of it too so um after we understand these different things that would trigger nexus for the seller and for the drop shipper let's talk about sales tax so when the seller sends an invoice to the customer it needs to include sales tax to the customer where they have physical nexus so and if and if they pass economic nexus in that state where the customer is residing if it doesn't have physical presence in where the customer is or it doesn't pass economic nexus threshold in where the customer is it doesn't need to charge sales tax but this is the important part and we get most questions asked by our clients that are either the seller or drop shipper to ask why do they need to charge sales tax how who should be paying sales tax so it's very important to know that the drop shipper charges sales tax to the seller it's the drop shippers it's the drop shippers responsibility to either charge sales tax from the seller where they have physical presence or where they pass economic nexus presence if the seller is in one of those states unless the seller can give them resale certificates so this is the interesting part so the drop shipper will charge the seller sales tax unless the seller can provide dropshipper a valid resale certificate so if you are a seller and you use a drop shipper you are most likely being charged sales tax unless you can provide a resale certificate to your job shipper telling them i'm buying these products for resale and the customers will eventually pay sales tax so don't charge me sales tax on my invoice if you are a drop shipper after you analyze your nexus footprint and you determine where you have nexus charge sales tax in those um states where your sellers are unless they can provide you a resale certificate so if you're a seller and you want to provide a resale certificate to your dropshipper so you don't have to pay sales tax on the invoice that your dropshipper is sending you there's lots of ways to get a resale certificate obviously if everybody is in the same state the one form would be sufficient to provide to your drop shipper if the seller and the drop shipper are in the same state that make it easier too but sometimes where the seller have nexus where they're located and where the dropshipper is it's not the same so let's go back to my example if the seller's in california the drop shippers in utah and the seller does not have physical presence or economic nexus in utah because they don't sell enough and they are not like located in utah they don't have any employees they are not going to register to collect tax in utah so they don't have a utah resell certificate but here the warehouse the dropshipper the dropshipper in utah they drop ship for so many business across the country and especially in california just as as an example so they will charge so they pass economic nexus and they're delivering to utah customers so they will charge sales tax um to this california vendor so the california vendors wants to not pay sales tax because it's saying i'm reselling the products to other customers but the california seller does not have a utah resale certificate it only has a california resell certificate but the utah dropshipper won't accept an out-of-state resell certificate they will only accept utah and actually something else which i talked about in the sst and mtc forms and that's why it's so good to utilize the mtc and ssd forms because those forms are accepted by so many states so if the seller does not have nexus where this drop shipper has and the drop shipper is asking for resale certificate and the seller does not want to register in all the states that they don't have economic nexus or physical presence in the seller right here to get this resale certificate they can use the mtc or the sst form or there is 10 states that are very difficult and you have to register to get the resale certificate to provide to your supplier but besides those 10 states most of the time the seller can either get use the mtc form or the sst form to provide resale certificate to their drop shipper so the drop shipper won't charge them sales tax on their transaction okay that is a ton of information so and i'm sure you guys have like different scenarios where your business is operated in so feel free to leave me comments and ask me questions but just like chart it out for your scenario and ask yourself where do i if you're the seller ask yourself where do i have physical presence where do i have economic nexus and know that your economic nexus is solely determined by your customers by your sales and if you're a dropshipper ask yourself where you have physical presence where you have economic nexus and that's determined by where your delivery where you have people where you have warehouse and for all the sellers you're delivering for they are creating economic nexus for you so let me know if you have any questions and if you like this video please like it and share it with your fellow drop shippers and sellers that use drop shipping so we can just share the knowledge and have them understand where sales tax come in as well um if you want to know more about sales tax we do have an intel master class that you can register for it has a ton of good information and if you're an accountant or a bookkeeper and that and you want to come and work with me um check out our hr page we are actively hiring so hopefully you can join the team and i hope you all have a good day and i'll talk to you soon bye

Channel: LedgerGurus

Views: 14,225

Keywords: Dropshipping sales tax, Everything You Need to Know About Sales Tax for Dropshippers, dropshipping taxes, sales tax, drop shipping, shopify taxes, sales tax explained, sales tax for online business, amazon dropshipping, ecommerce sales tax, ecommerce accounting, online sales tax, sales tax exemption certificate, dropshipping taxes usa, dropshipping 2022, dropshipping on amazon, dropshipping for beginners, dropshipping taxesipping taxes, dropshipping sales tax tutorial, ebay

Id: suUqOj3bhvs

Length: 16min 55sec (1015 seconds)

Published: Thu Mar 24 2022