Dropshipping is a popular business model in which products are shipped directly from the manufacturer or wholesaler to the customer. In this system, the retailer does not need to purchase and store inventory, which can reduce costs and increase efficiency. However, it is important to understand the rules and regulations regarding sales tax when dropshipping.

Generally, the first retailer in the series of drop shipment transactions is responsible for the sales tax. This retailer is the in-state retailer that received the order from the out-of-state retailer.

In order to determine who pays sales tax when dropshipping, here is a breakdown of the rules:

In-State Retailers

  • In-state retailers are liable for sales tax on all drop shipments, regardless of the location of the purchaser.

Out-of-State Retailers

  • Out-of-state retailers are not liable for sales tax on drop shipments to customers in their home state.
  • Out-of-state retailers are liable for sales tax on drop shipments to customers located in other states.

Wholesalers

  • Wholesalers are not liable for sales tax on drop shipments.

Manufacturers

  • Manufacturers are not liable for sales tax on drop shipments.

It is important to note that sales tax rules vary from state to state, so it is important to check the specific laws in each state to ensure compliance.

Overall, the first retailer in the series of drop shipment transactions is liable for the sales tax. This retailer is the in-state retailer that received the order from the out-of-state retailer. It is important to understand the rules and regulations for sales tax when dropshipping in order to remain compliant.

Last Updated: 1 Jul 2021