Drop Shipping

Manufacturers often drop ship products for retail customers. This can be a major convenience for the end user and the retailer alike. Say you build swing sets. You sell them wholesale to Happy Toys, a retail toy store.

Instead of finding space to keep your swing sets in inventory, Happy Toys sells your swing sets to customers and you drop ship the product to their homes. This helps Happy Toys avoid inventory storage issues, and their customers don’t have to worry about fitting the swing sets into their cars. Happy Toys doesn’t have to worry about delivery, either. It’s a win-win.

Happy Toys buys from you for resale. They provide an exemption certificate showing that they’re a bona fide reseller, exempt from sales tax. The principle is this: sales tax should be paid only once along the path from manufacturer to end user. In this case, Jane buys your swing set from Happy Toys and pays Happy Toys. Happy Toys collects sales tax on that purchase.

Online sales

If Jane walks into the store and makes her purchase, Happy Toys collects the sales tax. You have an exemption certificate on file for Happy Toys. This is simple.

But if Jane buys the swing set online from the Happy Toys website, things can get a little sticky. You ship the swing set from your state to Jane in her home state, and Happy Toys is in a third state. Depending on the specific sales tax rules in the three jurisdictions, Happy Toys might not have to collect sales tax from Jane. You may not think that you have to worry about this at all. No matter what happens, you still aren’t involved in the sales tax issue, right?

In fact, in some states, you might be responsible for that exemption certificate… and you might not be able to get proper paperwork from Happy Toys. If Happy Toys does not have nexus in Jane’s state, they probably haven’t registered their business in that state. That could mean that you can’t get a proper certificate of exemption for Jane’s jurisdiction.

Typically, Jane’s state is officially the location of the sale, even though both you and Happy Toys are in other states.

As the shipper, you could be held responsible. In some jurisdictions, Jane will be responsible for paying use tax to her state, but you might still be required to send information about the amount of use tax required to her and to the state government. In others, you may be required to collect sales tax from Happy Toys and remit it to the state where Jane lives.

Does nexus matter anymore?

The recent Supreme Court decision known as Wayfair allows states to require online sellers to collect sales tax regardless of physical nexus. 21 states have already put laws in place, and those laws vary quite a bit. Rhode Island, for example, plans to require sales tax collection retroactively from August 2017. Massachusetts is ready to charge sellers for sales tax from October of 2017 if their websites use cookies in Massachusetts. Washington state plans to require any seller with $10,000 in transactions to collect sales tax.

Online sellers will soon find that they have to register and keep track of sales tax in every jurisdiction.

For manufacturers who drop ship, this is good news. States that take the position that somebody has to collect that sales or use tax won’t need to look to shippers anymore. Retailers will be required to submit exemption certificates for all jurisdictions. Manufacturers will need to keep track of those certificates and be prepared to provide them when asked.

But it’s a long road from here — when drop shipping can put manufacturers in the crosshairs — to the simpler future when use tax is a thing of the past. In the meantime, it makes sense to be vigilant about sales and use tax. Get on top of the issue now and avoid the nightmare of audits when states get their post-Wayfair laws on the books.

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