The place to find business sales tax information

— as well as solutions, services and jobs!

Drop Shipments

Third Party Shippers and Other Multi-Address Scenarios

Brought to you by:

Drop-shipping is an issue which impacts virtually any individual or company purchasing goods. While this scenario is very prevalent in e-commerce scenarios, it is becoming increasingly common in many other retail sales environments.

What are Drop Shipments (aka Drop-Ship)?

In a drop shipment transaction, the retailer does not hold the inventory that is delivered to the end consumer. Once the order is accepted, the retailer contacts the product supplier/shipper and asks them to ship the goods directly to the retailer's customer - the end consumer. The supplier/shipper will invoice the retailer - and the retailer will invoice the consumer.

Why Drop-Ship Taxation Gets Complicated:

Generally, if a seller has nexus in a state and has registered to collect sales tax, they are required to collect sales tax on all taxable sales delivered into that state. Drop ship transactions differ somewhat in that the purchase by the retailer (from the supplier/shipper) is in effect a purchase for resale - which is normally exempt from sales tax. However, quite often drop ship taxation becomes more complicated, as often the retailer is not registered in the ship-to state but the supplier/shipper is. In such cases, the supplier/shipper is obligated to collect tax from the retailer on the drop ship transaction unless the retailer can provide exemption documentation (deemed acceptable by the ship-to state). If a supplier/shipper is shipping product directly to a state in which they are not registered (and/or do not have nexus), then the supplier/shipper does not have an obligation to collect sales tax for that state. However, it is advisable for the supplier/shipper to still obtain appropriate resale documentation from the retailer for such ship-to states, in case it is later determined that the supplier/shipper did in fact have nexus. Additional complications may be present if the retailer's (end consumer) customer is claiming an exemption. In some cases such an exemption can be "passed through" to the supplier/shipper to claim the exemption.

Drop-Ship Exemption Documentation Requirements:

It is important to note that states vary in their rules regarding the exemption documentation that can be used in order to substantiate a sale for resale in drop shipment situations. Some states have developed alternate documentation rules. Depending on the jurisdiction, acceptable documentation can include home state registration or resale certificates, the MTC Multi-Jurisdictional Exemption Certificate, the Streamlined Sales Tax Exemption Certificate, the ship-to state resale certificate with the home state number or a no nexus statement or other alternative documentation that demonstrates that the transaction truly is a sale for resale. However there are other states (approximately 11) which require a reseller who is claiming a resale exemption to be registered to collect sales tax in their state. These states require a resale certificate with a registration number (from that state) to be issued in order to document the resale exemption. Once registered, retailers will be able to issue a resale certificate but they will also be required to collect sales/use tax on all taxable sales to customers in these states. Given the varying requirements, it is important that drop-ship retailers (as well as suppliers/shippers) consider the exemption requirements on a state by state basis.

Will Sales Tax Registration Trigger Other Tax Obligations in Ship-to States?

In order to obtain resale exemptions in all states, parties to drop shipment transactions may find it necessary to register in additional states. Some companies worry that this can bring about other tax obligations in those states. Generally, income tax liability is not a concern unless the company meets the nexus thresholds for income tax. If the company definitely does not have any nexus or presence then it is not likely they will be required to file income tax returns. (However, this should be reviewed with your income tax advisor.) That said, states are getting more aggressive in identifying any potential unregistered taxpayer. One method is to compare registrations between not only sales tax and income tax, but all other taxes and state licenses and registrations. For that reason it is imperative that a company does a comprehensive review of its activities prior to registering for any taxes. (This includes related entities.)

Drop-Ship Assistance and Other Resources:

If you require assistance regarding sales tax issues, YETTER is available to provide a broad range of services. Please call Diane Yetter at 312-701-1800 to discuss your requirements. The Sales Tax Institute also offers classes which review sales tax basics - through to advanced issues and best practices.

See the CURRENT list of all Sales Tax Institute Online Courses & Webinars - Including Puerto Rican VAT Reform.

Don't forget about these additional DROP-SHIP resources:

Sales Tax Institute's "News & Tips" (Retail)

Diane Yetter Talks Drop-Ship on You Tube

Please visit the YETTER web page for more information on drop shipments and the tax consequences and to order the CCH book Drop Shipments Taxation, Compliance and Planning written by Diane Yetter.

If you subscribe to CCH IntelliConnect Tax Research, we have also written a publication that is available there. For more information, see Drop Shipments section in Sales Tax Research & Compliance Manager.

Are you a multi-state company with a DROP-SHIP question that we have not yet covered here - or in our Sales Tax Archives (below)? If so - Submit it here.

Sales Tax Questions - Drop Shipments

Filter by topic or industry using the dropdown menus, or use the search field to filter by search term.

Question/TopicDateTopicsIndustries
If VA dropshipper registers for resale exemption certificate in CA, is there CA income tax exposure?2014-11-24Drop Shipments
Exemptions - Resale or Other
Nexus
E-Commerce / On-Line Sales
If drop ship customer picks up order from vendor, do we charge sales tax? What if vendor performs additional service prior to pick-up? 2014-06-16Drop Shipments
Exemptions - Resale or Other
We do most of our drop-ships from China. Do we need resale certificates for customer's ship-to location in US or is this not necessary if they accept ownership before it leaves China?2014-03-17Drop Shipments
Exemptions - Resale or Other
International Issues
E-Commerce / On-Line Sales
Export / Import / International
Manufacturer
We have customers in Canada, who sell our products in the US. We are one of their drop-shippers and have nexus in 15 states. Should they be charged sales tax?2014-03-17Drop Shipments
Exemptions - Resale or Other
International Issues
Furniture
I have an Australian ecommerce website for US customers and will drop ship goods within USA - and also use FBA (Fulfilled By Amazon) to store and ship. Do I need to incorporate in USA and register for tax?2014-03-14Drop Shipments
International Issues
Internet Taxation
E-Commerce / On-Line Sales
Export / Import / International
We own an eCommerce website and are situated in Canada. Our drop-ship suppliers are all in US and we sell only to US. We do not not charge sales tax. Is this legal? 2014-02-05Drop Shipments
International Issues
Nexus
E-Commerce / On-Line Sales
Furniture
Our customer the reseller has provided a NY resale certificate. We are doing drop ships for them in various states. Is their NY certificate valid for multiple states? 2013-10-28Drop Shipments
Exemptions - Resale or Other
Internet Taxation
E-Commerce / On-Line Sales
I am a Canadian eCommerce seller who drop-ships US products to US customers. Do I need to collect US state's sales tax when my taxes go to the Canada government?2013-08-05International Issues
Internet Taxation
Nexus
E-Commerce / On-Line Sales
Export / Import / International
I started an online shop. My drop-shippers required me to obtain a Resale Tax certificate. I thought on-line stores don't charge sales tax? Is this right? 2013-07-10Drop Shipments
Exemptions - Resale or Other
Internet Taxation
E-Commerce / On-Line Sales
Wholesale or Reseller
We have an office in the state that purchases all supplies for resale but we have the items drop-shipped. What tax rate should we be charging? 2013-07-08Compliance - Order Sourcing
Drop Shipments
Taxability of Product or Service
Film Production
We are a FL dealer for a CA company. We have a FL exemption certificate. We have a CA customer who wants item drop-shipped to them in CA. Do we charge sales tax? 2012-08-08Drop ShipmentsAffiliate / Agent / Dealer
We are a TX online business and we only charge tax on TX sales. We received an order from CA - that was to be shipped to TX. Can a CA seller's permit exempt this sale? 2012-03-06Drop Shipments
I have a NJ resale certificate. I asked to have a taxable item drop shipped to a state where I do not have nexus but drop-shipper does. How can this be managed?2012-03-05Drop Shipments
Drop-shippers are charging sales tax on shipments into states where they have nexus and say resale certificates are required in order to stop doing so. Is that correct?2011-12-28Drop ShipmentsClothing
E-Commerce / On-Line Sales
As sales brokers, we rarely (if ever) physically touch the products we sell. Are transactions of this type subject to sales tax?2011-12-27Drop Shipments
Exemptions - Resale or Other
Affiliate / Agent / Dealer
Equipment Sales / Service
Installation / Parts / Repairs
If we drop-ship parts to a machining house in Arizona and our end customer is based in Canada - are they subject to sales tax or need to provide exemption certificate?2011-12-26Drop Shipments
International Issues
Equipment Sales / Service
Manufacturer
Our business does a lot of drop shipments from our vendors. Do we need to apply for resale certificates in states where our drop-shippers are located? 2011-12-05Drop ShipmentsComputers / Technology
E-Commerce / On-Line Sales
We are a dealer/reseller located in PA. Can sales tax be charged twice on the same material if it is drop shipped? 2011-10-19Drop ShipmentsAffiliate / Agent / Dealer
Equipment Sales / Service
We are being charged sales tax by our vendor on drop-shipments to customers that are exempt if we ship. Can this be right? 2011-08-06Drop ShipmentsEquipment Sales / Service
We are an MA based internet retailer and we drop ship from vendors in CA. Are we eligible for tax exemption on CA sales since the bill-to address is in MA? 2011-05-23Compliance - Order Sourcing
Drop Shipments
Equipment Sales / Service
Our corporate office is in Maine but our warehouse is in MO. Product is received at warehouse or drop-shipped to customer. If we drop ship, are we subject to sales tax? 2011-05-18Compliance - Order Sourcing
Drop Shipments
E-Commerce / On-Line Sales
I am starting an e-commerce website out of a home office and will drop-ship all product. Do I need to get a Sales & Use or Reseller license? 2011-04-15Drop Shipments
Internet Taxation
E-Commerce / On-Line Sales
My CA company drop-ships to a dealer's customer in FL where we do not have nexus. Is their CA resale permit acceptable for all interstate and intrastate sales?2011-02-07Drop ShipmentsAffiliate / Agent / Dealer
E-Commerce / On-Line Sales
We drop ship product into CA for our customer who does not have a CA resale certificate. Are we liable for the sales tax?2011-01-24Drop ShipmentsE-Commerce / On-Line Sales
Manufacturer
We are registered in 2 states. Do we need to file returns in all states to which we (or our vendors)ship - or just those where we are registered?2011-01-24Drop Shipments
Exemptions - Resale or Other
Equipment Sales / Service
Government Contractor / Business
We are located in CO but drop-ship nationwide. Do I need to register in every state? Which forms do I need? .2010-08-23Drop ShipmentsEquipment Sales / Service
Manufacturer
Our equipment sales company drop ships to multiple states. Which states require more than resale certificates? 2010-05-07Drop ShipmentsEquipment Sales / Service
Service / Maintenance Agmts
We will drop ship to a foreign location for a CA customer who does not have a resale certificate. Do we have to charge tax?2010-01-14Drop Shipments
International Issues

Return to Sales Tax Question Home — or Back to top of Drop Shipments page

Disclaimer:

Access to any portion of SalesTaxSupport.com is contingent upon your acceptance of our Terms of Use. This Web Site and content provided by STS Publishing, LLC and its third party content providers, including, but not limited to information, documents, forms, comments, advice and opinions, is for informational purposes only, and is not a substitute for professional advice, nor does the use of this Web Site constitute a professional-client relationship. The Web-Site also includes advertisements, directory listings, job postings and links to third party web sites, all of which are provided for your convenience only and in no way constitute a referral, endorsement, or warranty by SalesTaxSupport.com of any product or service provided by such third parties. All content is provided “as is” with no guarantee regarding accuracy, suitability, or timeliness. Your reliance on any content accessed on or through the Web Site, or on any product or service provider is strictly at your own risk.