How Drop Shippers Handle Sales Tax When They Have No Inventory

Key Takeaways

• Drop shippers still owe sales tax based on where they have nexus and where the customer receives the product.
• Most drop shipping tax issues come down to reseller certificates, marketplace rules, and getting the “seller of record” correct.
• Economic nexus is commonly triggered at $100,000 in sales or 200 transactions in a state (many states use one of these tests).
• Clean documentation (exemption/resale certificates, invoices, and shipping records) prevents double-tax and audit problems.

1) Map Your Drop Shipping Model (Who Sells, Who Ships, Who Collects)

1. Confirm the seller of record. The seller of record is typically the business that takes the customer’s payment and sets the retail price.
2. Identify all selling channels. Separate:
   • Your own website (you’re often the collector when you have nexus).
   • Marketplaces (collection is often handled by the marketplace facilitator, but you still track nexus and exemptions for non-marketplace sales).
   • B2B vs. B2C (resale and exemption handling changes the workflow).
3. List where products ship from. Even without inventory, your supplier’s ship-from location can affect your audit trail and, in some states, creates “inventory nexus” if you store goods there (common with 3PLs or FBA-style arrangements).
4. Classify your products for taxability. Apparel, groceries, supplements, and digital goods can have special rules; build a SKU tax profile early.

Ready to get started? Apply online now.

2) Determine Where You Have Sales Tax Nexus (Even With No Inventory)

Step 2A: Check physical nexus triggers

1. People and offices: employees, contractors, sales reps, or an office in a state can create nexus immediately.
2. Storage and fulfillment: using a warehouse, fulfillment center, or 3PL in a state commonly creates nexus on day one.
3. Trade shows: attending shows can create temporary obligations in some states; keep show dates and sales totals by state.

Step 2B: Check economic nexus triggers

1. Pull your last 12 months of sales by ship-to state. Use gross revenue (before refunds) unless your state rule specifies otherwise.
2. Compare to common thresholds. Many states use:
   • $100,000 in sales into the state in the current or previous calendar year, and/or
   • 200 separate transactions into the state in the current or previous calendar year.
3. Flag states where you are close. If you’re within 80% of a threshold, plan registration so you can start collecting on time.

Step 2C: Separate marketplace vs. non-marketplace sales

1. Marketplace-facilitated transactions: often collected by the marketplace, but still count toward economic nexus in many states.
2. Your direct sales: you’re responsible for tax calculation, collection, and remittance where you have nexus.

3) Register for Sales Tax Permits in the Right States (Before You Start Collecting)

1. Create a state list. Include each state where you have:
   • physical nexus (immediate),
   • economic nexus (as soon as you meet the threshold), or
   • a required registration due to special product rules (for certain regulated goods).
2. Time your registration. Aim to register 2–4 weeks before you expect to begin collecting so you can update checkout settings and tax mappings.
3. Know the “collecting before you’re registered” risk. Many states treat collecting tax without a permit as a compliance violation. Align your go-live date with approval and your effective permit date.
4. Plan for filing frequency. New registrants are commonly assigned monthly or quarterly filing based on expected volume. Missing the first assigned due date is one of the fastest ways to trigger notices.

Need a refresher on the paperwork and timing? Review the 2022 State Sales Tax Application overview to organize your state-by-state registrations.

4) Handle Resale Certificates Correctly (So You Don’t Pay Tax Twice)

Step 4A: When you should provide a resale certificate to a supplier

1. Supplier is charging sales tax on your wholesale purchase. If you’re buying for resale and the supplier has nexus where the sale occurs, a resale certificate may allow a tax-free purchase.
2. You are the retailer (seller of record). You plan to collect tax from the end customer (when required) rather than paying tax at wholesale.

Step 4B: What to collect from your customer (B2B sales)

1. Get an exemption certificate before the sale is finalized. Late certificates can be rejected in audits; set your checkout to require it for tax-exempt accounts.
2. Validate completeness. A usable certificate typically includes:
   • legal business name and address,
   • state registration/permit ID (or a state-allowed alternate ID),
   • reason for exemption (resale, nonprofit, etc.),
   • signature and date.
3. Renew and track expiration. Some exemption documents expire or require periodic updates; review at least once per year.

Step 4C: Avoid the “double tax” trap

1. If the supplier charges you tax and you also charge the customer tax, you may create an over-collection problem and margin compression.
2. Fix it operationally: either (a) provide a valid resale certificate so the supplier doesn’t charge tax, or (b) treat the supplier’s tax as part of cost and do not charge customer tax unless you have the legal obligation and a way to recover it (often not practical).

Need help registering? Start your application.

5) Charge the Right Tax at Checkout (Destination, Sourcing, and Product Rules)

Step 5A: Use the correct rate basis

1. Destination-based states: charge tax based on the customer ship-to address (state + local where applicable).
2. Origin-based states: some states source to the seller’s location for in-state shipments; this matters if you have a physical location in that state.
3. Local rate complexity: rates can vary by city/county/special district. For example, Pennsylvania uses a statewide base rate with additional local rates in specific areas; keep a ship-to rate table handy when reviewing exceptions.

If you sell into Pennsylvania, keep a rate-reference nearby for spot checks and customer questions: Pennsylvania State, County, City, & Municipal Tax Rate Table.

Step 5B: Decide how shipping and handling is taxed

1. Set one consistent policy. Whether shipping is taxable can vary by state and by how it’s stated on the invoice.
2. Itemize vs. bundled charges. When shipping is separately stated, many states treat it differently than when it’s bundled into the product price.
3. Document your treatment. Keep invoice templates consistent so your tax logic matches what auditors see.

Step 5C: Ensure product taxability is configured

1. Build SKU tax categories. Apparel, food, and supplements can be taxed differently across states.