E-commerce grew by 41% in 2021. The most popular question that I get is:
What is drop shipping, and what are my sales tax obligations around drop shipping?
Understanding Drop Shipping
Drop shipping involves three players:
- The end consumer
- The website owner/seller
- The manufacturer
Let’s simplify this situation with these key questions:
- Do I have nexus?
- Is what I am selling taxable?
- How do I sell it (brick-and-mortar or website)?
- Who took ownership at what time?
Start with Nexus
There are two transactions in a typical drop shipping scenario. You need to determine the responsibilities between the involved parties:
- One transaction occurs between the distributor and the seller
- Another transaction occurs between the seller and the customer
The distributor invoices the seller, and then the seller invoices the buyer.
The Universal Rule
Sales tax is always based on where the product is shipped, depending on nexus and taxability.
Key Consideration in Drop Shipping
In a drop shipment situation, it’s clear that it’s a resale. However, it’s not a typical resale transaction because you’re not taking title of the property.
Where you provide the resale certificate is another crucial issue.
Not every state is alike.
States do not always treat shipments the same way, so the rules differ state-to-state.
Georgia What Does the Peach State Say?
Drop Shipping and Resale in Georgia
- Georgia dealers are not required to collect Georgia sales and use tax in a third-party drop shipment transaction when the purchased products are for resale.
- The purchaser must provide the seller with sufficient documentation confirming that the product purchased is for resale purposes.
Shipping and Handling Charges in Georgia
- Charges made for delivery, transportation, freight, or shipping and handling are part of the sales price
- These charges are subject to sales tax in the same manner as the underlying sale
Out-of-State Sales and Nexus in Georgia
- Georgia businesses only need to pay sales tax on out-of-state sales if they have nexus in other states
- Nexus means the business has a physical presence in another state
Frequently Asked Questions
What is drop shipping and how does it work?
Drop shipping is a retail fulfillment method where the seller doesn’t hold inventory. Instead, customer orders are forwarded to a third-party supplier (usually a manufacturer or distributor), who ships the products directly to the customer. This model involves the seller, the distributor, and the customer.
Do I need to collect sales tax on drop shipped items?
Sales tax collection depends on whether you have nexus (a taxable presence) in the state where the customer resides. If you do, and the item is taxable in that state, you’re generally responsible for collecting and remitting sales tax on the sale.
How does Georgia treat sales tax in drop shipping transactions?
In Georgia, dealers are not required to collect sales tax on third-party drop shipped items intended for resale, as long as the purchaser provides valid resale documentation. However, shipping and handling charges are considered part of the taxable sales price and are taxed accordingly.
What is nexus and why is it important in drop shipping?
Nexus refers to a business’s physical or economic presence in a state. If you have nexus in a state, you are required to comply with that state’s tax laws, which includes collecting sales tax on eligible transactions involving customers in that state.
Are shipping and handling charges taxable in Georgia?
Yes. In Georgia, charges for delivery, transportation, freight, or shipping and handling are part of the total sales price and are taxable in the same way as the underlying product.