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The 5 W’s of Drop Shipping Tax Rules: Who?


The 11,000 U.S. tax jurisdictions include states, counties, cities, and districts, each with its own continuously changing regulations and documentation requirements. “Districts can be anything from an economic development zone to a transit, library, or police jurisdiction,” said Pete Bunio, Tax Research and Support Lead at Vertex.

Retailers must be able to quickly verify which tax rules and rates apply to the customer’s location and correctly calculate the state + city + county + district tax.

PricewaterhouseCoopers predicts an uptick in legislation to expand nexus standards, limit exemptions and loopholes, and impose taxes on products/services that were traditionally exempt. “Moreover, federal and state legislation will impact how states treat out-of-state taxpayers, specifically around expanded nexus provisions and market-based sourcing implementation,” according to the Tax Function of the Future report.

States are starting to declare that drop shippers create nexus for the retailer. They’re viewing the drop shipper as an extension of the retailer, and since the drop shipper has a physical presence in the state, the retailer has to register and collect sales tax in that state.

That won’t just mean for drop ship customers. “The retailer would then have to charge every customer from that state sales tax, whether or not they received the item via drop ship,” Bunio explained.

States also are becoming more restrictive in accepting out-of-state resale certificates. That introduces the problem of demanding drop shippers collect taxes and determining whether those taxes are based on the wholesale or retail price.

To learn more how Vertex Cloud can help navigate your company through the complexities of taxes through drop shipping process, schedule a demo now.


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