Hi,

I need advice on how sales tax is handled when drop shipping. I am a NY company and only have a presence in NY. I collect sales tax in NY (which is a ROYAL pain in the neck the way they make you determine it), and report it in NY.... nowhere else. My primary drop shipper just told me that they are going to make ME pay sales tax to THEM for every state that THEY have a presence in if I don't produce tax exempt certificates for all of those states (8 all together). Their logic is that they have to collect sales tax any place they have a presence. I have tried to argue with them that I am doing the retail transaction here and they are the wholesale channel, and I don't have a presence in those states, so therefore they are not responsible for collecting it. They are big and I am small, so they are just shutting me down and telling me I have to call all the states and get them to tell them that they are doing it wrong.... like that is going to happen since the states would LIKE you to pay tax even where you don't have a presence.

I'd like to know if I'm barking up the wrong tree, or if I'm right. My margins are pretty small, so this is a big deal.

Wierd.

You supply them. They are not in NY...so you do not charge then sales tax.

They now have your product. They are usinf you as a distribution hub. It is THEIR responsibility to collect tax from THEIR clients. They are the ones that have the presence in these different states. You are just delivering the goods to them.

They want you to pay their tax by the sound of it.

Simon

Ps...I am not in the US ...I know little about US tax so I am applying the laws of common sense. I understand that this may not well apply in the USA :)

Mike,

I'd suggest asking an accountant about that. There are a lot of states that now have mutual agreements with one other that can impact the taxation rules that may/may not apply to you.

I don't know the answer to your question but your best resource who can give you a 100% answer would likely be a local accountant in your area.

Simon,

You have the equation backwards. I am the retailer. I only exist in NY. They are my supplier. I buy from them, and resell to my customer. But, in this case they are doing my fulfillment and shipping direct to my customer. They have told me that if I have them ship to me, then reship to the customer, then they wouldn't charge me tax.

Hi UtopiaHost,

I am really sorry to be the one to tell you this, but your dropshipper is absolutely correct - and frankly, Im surprised this hasnt surfaced earlier.

Although you are the retailer, who is actually selling the product, uncle sam really doesnt care. As you mentioned, they are really only after one thing, and thats tax dollars.

The wholesaler is responsible for collecting appropriate taxes for all States they ship product into and will be taxed accordingly - therefore it only makes sense that they are passing this cost onto you.

What it seems like they are not telling you - they are getting charged taxes on their sale price to you, not the price you sold the product to your customer for. Might not make a big difference, but thought Id mention it anyway.

Try finding smaller dropshippers to work with that have presences in fewer locations. Also, not sure what your margins are, or how commoditized your products are, but you may consider raising your prices to compensate.

I experienced the exact same thing in Canada here, I'm in BC, my distributor will drop ship from the BC location and from their Ontario and Quebec locations for me, but I will be charged tax for Ontario and Quebec which I either have to build into the price, register for a tax code for those provinces or charge a surcharge for delivery there.

I went with the latter and explained it on my site, I dropped my computer hardware product line basically because of the hassles involved with this type of stuff, PITA.

BTW, these States/Provinces are enforcing it via the distributors who are in their jurisdictions because otherwise the end-users are NOT paying the taxes and in most cases they are legally obligated to do so.

Thanks Gargoyle... what I'm going to need to do is fix the problem in my shopping cart, which can be done. You introduced a real complication, however. Because I hadn't thought about the cost vs. price taxable value. If I get tax exempt certificates for the states they ship into, it would only need to apply for products that are shipped from that one warehouse.... so I'd need to only report income to them for goods sold from that warehouse, and that will be complex. I will see how it effects my overall profit and go from there. I may have to just charge tax for more states, which may effect my sales.