Dropshipping is a popular e-commerce business that offers fantastic flexibility and is easy to manage. That's why entrepreneurs flock to dropshipping as the perfect business model to have in their portfolio.
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However, running a dropshipping business can be confusing sometimes. For instance, how does sales tax work for an e-commerce site? We're going to clear that up for you here so you can have a more thorough understanding of dropshipping sales tax and can move forward with your business.
With dropshipping, two different purchase orders are going through, the one the customer makes on your site and the one your business makes to your dropshipping supplier. Determining who pays the tax and where it is paid is something you should know before starting the business. We're going to help you figure that out right now.
What Are Sales Taxes, VAT, & GST?
Consumption taxes need to be paid when there is a purchase order that goes through for goods and services. Sales tax, VAT, and GST are all types of consumption taxes.
These taxes are more of the same, and each country decides which type of tax they use. They can be charged as a flat rate or as a percentage of the total value.
Each type needs different responses from the business owner. However, in the end, the customer is the one who pays the sales tax. The name is consumption tax for a reason, because it is based on how much the consumer engages with the market.
Simply put, a consumption tax is a tax put on customers for using services. So who collects the tax? You, the dropshipper? Or the supplier?
Does The Supplier Collect Sales Tax?
No, you don't have to pay sales tax to the supplier usually.
As a dropshipping business, you don't have to pay tax your supplier. That's because there's a sales tax exemption for purchases that are intended for resale. However, for your dropshipping business to be sales tax exempt, you need official exemption certificates.
Sales tax exemption certificates are also known as resale certificates. The rules and regulations for these certificates vary from one state to another. Some states only accept in-state issued certificates and some accept multi-state ones.
There are a few certificates you can apply for. One of them is the Multistate Tax Commission. This certificate works more or less like a blanket certificate because it is accepted in 38 states.
However, if you are registered for taxes via the SSUTA, then the Streamlined exemption certificate is all you need as it is accepted in all Streamlined member states.
So when you are signing up for a dropshipping program with a supplier, you need to present the suppliers with a complete exemption certificate. That's the only way for the supplier to exempt you from sales tax.
Should You Charge Your Customer Sales Tax?
As a dropshipping business, you may need to charge your customer sales tax. It depends on whether or not your business is in a state that has sales tax nexus or not. Here are the two options:
- If you have sales tax nexus in the state, you have to register for sales there. This means you have to collect and remit sales tax in all the states you registered. It gets a bit confusing with dropshipping businesses because some states charge tax on the full retail price and some only on the wholesale price.
- If you don't have a nexus in the state, then it usually means that you don't have to charge sales tax. However, if you are a dropshipper who's delivering products in the same state you are located in, you might have to charge sales tax. States like California, New York, Texas, and Florida all have clauses that can make sure in-state suppliers to qualify as a nexus.
Get Your Tax Exemption Certificates
Now you don't have to wonder, "How does sales tax work for dropshipping?!" It really isn't too complicated, it's just something you might have forgotten to check out before starting your dropshipping business. But, now you're ready to go!
If you're looking to build a dropshipping business, just do your research. Look at the state tax policies to make sure you are setting up your business correctly.
Here are some state government websites that will direct you to the revenue department of each state.
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