Dropshipping is a business model in which ecommerce entrepreneurs sell products without having to carry any inventory. When a store owner receives an order from a customer, they simply contact the supplier, who will then ship the products directly to the customer’s doorsteps. Dropshipping apps like Oberlo make it easy to find and add products to your store in just a few clicks. While dropshipping is a great way to start an online store with little up-front investment, there are still some important things to be aware of – including sales tax. In this article, we’ll explain everything you need to know about collecting sales tax on dropshipping orders.
What is Sales Tax?
Sales tax is a tax levied on the sale of goods and services. The tax is usually calculated as a percentage of the sale price and is collected by the seller from the buyer at the time of purchase.
Sales tax is generally imposed on all sales of tangible personal property and certain services. Tangible personal property includes items such as furniture, clothing, books, and automobiles. Services that are subject to sales tax include repairs, installation, cleaning, and landscaping.
Most states exempt food, prescription drugs, and other items from sales tax. Some states also provide exemptions for certain types of businesses, such as manufacturing or wholesale businesses.
Sales tax rates vary by state and locality, but they are typically between 4% and 10%. Some states have higher rates for specific items, such as alcohol or luxury items.
Do You Collect Sales Tax On Dropshipping?
Most businesses are required to collect sales tax on the goods and services they provide. This includes dropshipping businesses. However, there are a few circumstances where you may not be required to collect sales tax.
If your business is located in a state that doesn’t have a sales tax, you won’t need to collect it. Some states also exempt certain items from sales tax, so you’ll need to check with your state’s tax agency to see if your products fall into that category. Additionally, if you’re shipping products to customers in states where you don’t have a physical presence (also called “nexus”), you may not be required to collect sales tax.
One of the benefits of dropshipping is that it can be easier to comply with sales tax laws since you’re working with a single supplier. However, it’s important to make sure you understand the laws in your state and the states where your customers live so that you can properly collect and remit any taxes due.
How to Calculate Sales Tax on Dropshipped Orders
In the United States, sales tax is calculated based on the shipping address of the customer, not the location of the business. This can get tricky when dropshipping, because the products are shipped from a different location than your business.
To calculate sales tax on dropshipped orders, you will need to use a sales tax calculator. There are many online calculators available, or you can use a spreadsheet like Excel or Google Sheets.
When using a calculator, you will need to enter the following information:
The state where the customer is located
The county or city where the customer is located
The product’s cost The shipping cost The sales tax rate for the state (can be found online)
Once you have all of this information entered into the calculator, it will give you the total amount of sales tax that needs to be collected.
The Bottom Line
Sales tax is a complex and ever-changing topic, and there’s no one-size-fits-all answer to the question of whether or not you need to collect it on dropshipping orders. However, there are a few general principles that can help guide your decision-making.
First, it’s important to understand that sales tax is generally only owed on transactions that take place in states where the seller has what’s called “nexus.” Nexus is basically a physical presence in the state, and it can be created by having an office, warehouse, or employee in the state. If you don’t have nexus in a state, you generally don’t have to collect sales tax from buyers in that state.
However, even if you don’t have nexus in a state, you may still be required to collect sales tax if the state has what’s called an “affiliate nexus” law. These laws are designed to prevent out-of-state sellers from skirting their sales tax obligations by funneling sales through affiliate marketers who do have nexus in the state. So if your business has affiliates marketing your products in a state where you don’t have nexus, be sure to check whether that state has an affiliate nexus law before making any decisions about collecting sales tax.
