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


Ensuring sales tax compliance for a drop ship sale entails two big challenges.

First is quickly and accurately calculating the correct tax rate to display in the cart. That is growing increasingly critical as consumers demand choices when it comes to shipping — next day or even same day; locker; click and collect, work, or home address; evening or Saturday delivery; and so on. Shoppers are also comparing fully-landed costs with competitors’ offers.

To fulfill the order, retailers may source differently depending on the time frame selected, using different DCs, suppliers, drop shippers, or carriers. They must be able to calculate the full cost of each of these options — including taxes — accurately and nearly instantaneously to display the right data, noted Temando’s Hartmann. “Consumers will wait up to about one second in the shopping cart before loading time lag starts to impact abandonment, so having the ability to dynamically display full shipping cost at checkout is paramount.”

The second big challenge is proper documentation to support the remittance of taxes due and to successfully complete an audit.

“Every state a retailer adds via drop ship multiplies the documentation burden,” according to Bunio. For each one, retailers must:

  • Carefully track state, city, county, and district rates, laws and tax calendars;
  • Understand which items are taxable;
  • Collect and maintain exemption certificates for tax-exempt customers;
  • Comply with the correct filing calendars — monthly, quarterly, semi-annually, or annually according to revenue;
  • Complete documentation requirements;
  • Monitor for changes and instill them into internal systems and processes; and
  • Ensure the terms of trade are properly set up between retailer and drop shipper to address who pays for shipping and how taxes are handled.

Often retailers begin trying to manage their newly expanded drop shipping programs in-house, said Magento’s Sonier, only to quickly find issues including sales tax too complex to manage.

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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