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Drop Shipping: Understand Your Tax Requirements

Sponsored by Avalara

In a drop shipment relationship, there are generally three parties involved: the seller who accepts the order, the supplier who delivers it and the customer who placed the original order. Two transactions occur in this exchange, and it’s often difficult to figure out who is responsible for collecting sales tax and who is exempt.

The answer to this question depends mainly on whether the businesses involved in the transaction have nexus in the state in which the transactions occur. Nexus is generally defined as a direct or representational presence within a state. This presence requires companies to collect and remit applicable state and local sales taxes. Note that this is the general definition, as many states have different laws around what establishes nexus. If a company does business in many different states, knowing whether or not the entity is required to abide by those state’s sales tax laws quickly becomes confusing.

To make drop shipping even more challenging, when a business is exempt from paying sales tax on their purchase, the seller is required to collect a valid exemption certificate from the purchaser. They also are required to keep these certificates on file in the event of a sales tax audit, as these documents represent the missing sales tax revenue that is returned to the state, and states want all of the tax revenue they can get!

To help you figure out who is responsible for state taxes in drop shipments, we’ve put together a handy reference guide. Get yours now.

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