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 StatusDropshipper Has NexusDropshipper Does Not Have Nexus
Seller Has NexusDropshipper 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 NexusDropshipper 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.

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