Blog Tax News How Sales Tax Drop Ship Rules Work?

How Sales Tax Drop Ship Rules Work?

One of the most troubling tax issues for many businesses is the issue of drop shipments. This is often referred to as a third party sale and this type of tax can affect many types of businesses including wholesalers, manufacturers, retailers, distributors, and even the end users. In order to understand how a drop shipment is taxed it is important to understand the logistics of the entire transaction.

How a Drop Shipment Works

The steps of a drop shipment include:

1.    A retailer will accept an order from a customer for tangible personal property. The customer is the end user of the particular tangible personal property.
2.    Next the retailer, who does not have the tangible personal property, will place an order with a third party retailer, which is often a distributor or manufacturer.
3.    The third party retailer will then ship the item to the customer of the retailer directly, the final user. The invoice for the product is sent to the retailer.
4.    The customer will receive an invoice for the tangible real property from the retailer that they purchased it from.

How Does Sales Tax Apply?

The question is how does sales tax apply to this type of drop shipment transaction? The answer will depend partly on what states are involved in the transaction. Third party shippers that are not registered for tax collection in the state that they are shipping the property to, where the customer lives, on behalf of the retailer then the shipper will not charge any tax on the bill.

If the retailer or person selling the property has not registered in the state that the product is being shipped to, the responsibility of assessing the applicable taxes for the transaction will fall directly to the consumer who is receiving the product in the end.

Things become a bit more complex than this though. If the shipper happens to be registered to collect tax in the state where the product is being shipped to then they are required by sales tax law to collect the tax on the transaction from the retailer. Even though this is a resale transaction they are still required to charge the tax.

However, many states will allow the shipper to provide a tax exemption to the retailer as long as there is a valid resale certificate available. Most states will accept the resale certificate as proof that the product has been resold. There are some states that do not accept this and in these states tax must be collected.

Overall, the sales tax on drop shipping is quite complicated as each state is different. As items are being shipped across state lines there are different rules that apply from state to state. The tax laws for shipping something from California to Georgia are different than shipping the same item from California to New York. If running a drop shipping business it is best to consult Sales Tax Accountants to make sure that you are in compliance with the laws. Call 404-855-7000 today for a FREE consultation.

Thanks to Sales Tax Accountants our company was able to avoid an expensive audit and save tens of thousands
James Turner - Retail Supply Services

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