How To Determine Nexus In Dropshipping

Overview of Dropshipping Nexus

In a dropshipping setting, keep in mind that there are three main players involved:

1. Seller
2. Dropshipper (Distributor)
3. Customer

General Rule for Sales Tax

Sales tax is collected at the end-state of the sale, where the customer resides.

Note:
If the Dropshipper has Nexus, but the Seller does not, then the seller does not charge sales tax to its customers.
The Dropshipper would charge the seller sales tax, unless the seller has a resale certificate.

Scenarios to Determine Nexus in Dropshipping

When Dropshipper Has Nexus vs. No Nexus

Seller Status	Dropshipper Has Nexus	Dropshipper Does Not Have Nexus
Seller Has Nexus	Dropshipper charges Seller tax, unless there is a resale certificate. Seller charges its customer tax.	Dropshipper does NOT charge Seller tax. Seller charges its customer tax.
Seller Does Not Have Nexus	Dropshipper charges Seller tax unless Seller has a resale certificate. Seller charges customer tax.	Dropshipper does NOT charge Seller tax. Seller does NOT charge its customer tax.

Summary: How to Determine Nexus in Dropshipping

• Dropshipper has Nexus
  • Seller has Nexus:
    • Dropshipper charges Seller tax unless resale certificate provided
    • Seller charges Customer tax
  • Seller does NOT have Nexus:
    • Dropshipper charges Seller tax unless resale certificate provided
    • Seller charges Customer tax
• Dropshipper does NOT have Nexus
  • Seller has Nexus:
    • Dropshipper does NOT charge Seller tax
    • Seller charges Customer tax
  • Seller does NOT have Nexus:
    • Dropshipper does NOT charge Seller tax
    • Seller does NOT charge Customer tax

Key Takeaway

The existence of nexus for both the seller and the dropshipper directly impacts whether sales tax should be collected. Understanding these relationships ensures proper compliance with tax laws.

Frequently Asked Questions

What is nexus in the context of dropshipping?

Nexus refers to a physical or economic connection a business has with a state, which determines whether the business must collect and remit sales tax in that state.

Who is responsible for collecting sales tax in a dropshipping setup?

Responsibility depends on who has nexus. If the seller has nexus, they must collect sales tax from the customer. If the dropshipper has nexus and the seller does not provide a resale certificate, the dropshipper must charge sales tax to the seller.

What is a resale certificate and why is it important?

A resale certificate is a document that allows a seller to purchase goods tax-free if those goods are intended for resale. It prevents the dropshipper from charging sales tax to the seller.

Does the customer ever get charged twice for sales tax?

No, proper handling of resale certificates and nexus determination ensures that sales tax is only charged once, either by the seller to the customer or by the dropshipper to the seller.

What happens if neither the seller nor the dropshipper has nexus?

In that case, no sales tax is charged to the customer, as there is no legal requirement for collection due to the absence of nexus.