Sales Tax Implications of Drop Shipping

For drop shippers and the companies that use them, sales tax rules can be more confusing than a Rubik’s Cube. A drop shipment is a sale of tangible personal property (TPP), in which the seller accepts an order from a customer, places the order with a third party (such as manufacturer or wholesaler), and directs the third party to deliver the item to the customer. The third party may deliver the item using its own truck, arrange for delivery by common carrier, or arrange for the customer to pick up the item from a warehouse location. 

When it comes to sales tax, the complexity of the drop shipping equation is made more so by issues of nexus, product sourcing, customer location, and drop shipper location. For purposes of simplicity, this paper discusses sales tax issues at the intersection of the retailer, the wholesaler or manufacturer, and the drop shipper. In today’s economy, the wholesaler or manufacturer might also be the drop shipper, and customers can skip retailers and buy directly from wholesalers, but for purposes of clarity, these entities are defined more narrowly here.

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Avalara

Welcome to Avalara. We’ve been disrupting the status quo in the “scintillating” world of sales tax management since 2004, and we continue to blaze new roads in this very old industry.