3rd party drop shipments are becoming the life-blood of most e-commerce companies. More and more e-commerce companies don’t directly own any inventory. Rather, they have a vast network of suppliers that drop-ship products to the e-commerce company’s customers as needed. In a drop-shipment transaction, there are two sales that happen simultaneously at the point of destination. The first “sale” is between the supplier and the e-commerce company. https://www.salestaxstrategies.com/index.html This would generally be treated as a wholesale or sale for resale transaction. The second sale is between the e-commerce company and their customer. Depending on the products and customer, this second sale could be taxable or nontaxable. In working with most e-commerce companies on multistate sales tax issues, they want to focus on the second transaction because that’s the one where they may have a collection and remittance obligation. However, depending on where their supplier has nexus, many e-commerce companies should be more concerned with the first sale. If their supplier has nexus in the state where the shipment is made then the sale between the supplier and the e-commerce company is presumed to be taxable unless a proper exemption certificate is provided.
Many e-commerce companies don’t grasp the consequences of this issue until they get their first invoice from their supplier and it includes sales tax being charged in one or more states. Taking 6% to 9% tax out of an already slim gross profit margin may turn a profitable sale into a big loser!
If you are an e-commerce retailer that relies on drop-shipments to fulfill your orders, then you need to be asking your suppliers questions about where they have nexus and where they will be charging you sales tax unless you provide them with a valid resale certificate. In some states, avoiding the tax charged by suppliers can be easy. In other states, not so much!. Knowing the rules and planning your transactions accordingly is the key to maximizing profits and minimizing risks.
If you have any questions about this or any other multistate sales tax issue, please call me for a no obligation 30 minute consultation.
Ned Lenhart, CPA
President