Dropshipping Sales Tax: Resale Certificates and Who Collects

On this page 8 sections

1. Dropshipping Sales Tax Basics: How Three-Party Drop Shipments Are Taxed
2. Supplier Charging Me Sales Tax? When Your Supplier Must Collect
3. Getting and Using a Resale Certificate for Dropshipping
4. States That Don't Accept Out-of-State Resale Certificates
5. Do Dropshippers Pay Sales Tax? Collecting Tax From Customers at Checkout
6. Overseas Suppliers and Sales Tax
7. A Practical Sales Tax Checklist for Dropshippers
8. Next Steps

Key takeaways

• A drop shipment involves two sales, supplier to you and you to the customer, and the ship-to state's rules usually decide who collects tax.
• U.S. suppliers often charge you sales tax when they have nexus in the ship-to state and lack a resale certificate they can accept for that state.
• A valid resale certificate on file with each supplier is the main way to avoid paying tax on wholesale purchases and again on the retail sale.
• Overseas suppliers rarely collect U.S. sales tax, but your duty to collect from customers in states where you have nexus doesn't change.

Dropshipping sales tax confuses many store owners. One order involves three parties and two separate sales, and the customer, supplier and retailer may each be in a different state. This guide covers how three-party drop shipments are generally taxed and why a U.S. supplier may add sales tax to your invoice. It also explains how a resale certificate keeps you from being taxed twice, what to do when a state won't accept your out-of-state certificate, and how overseas suppliers fit in.

This article is general information, not tax or legal advice. Sales tax rules, thresholds and forms vary by state and change over time. Confirm your obligations with a qualified tax professional and each state's department of revenue.

Dropshipping Sales Tax Basics: How Three-Party Drop Shipments Are Taxed

In a standard drop shipment:

1. A customer orders from your store.
2. You place the order with your supplier, often automatically through an app connected to your storefront.
3. The supplier ships the product directly to your customer, usually with a blind packing slip showing your store name.

That one shipment involves two sales:

• The wholesale sale: your supplier sells the product to you.
• The retail sale: you sell the product to your customer.

Sales tax is generally meant to apply once, at the retail sale to the end consumer. The wholesale sale is usually exempt as a "sale for resale," but only if the supplier can document that exemption. In most states, the tax that applies is based on where the customer receives the product (the ship-to address), not where you or the supplier are located.

Who has to collect depends mostly on nexus, the connection to a state that creates a tax collection obligation. Nexus can come from physical presence, such as an office, employees or inventory you own in a warehouse. It can also come from economic nexus, where a state requires remote sellers to collect once their sales or transaction count into that state exceeds a threshold the state sets. Each state sets its own thresholds, so check each state's current rules.

Who Collects: The Four Common Scenarios

The third row causes most of the confusion and is the one that produces unexpected tax lines on supplier invoices.

Supplier Charging Me Sales Tax? When Your Supplier Must Collect

If your U.S. supplier has nexus in the state where it's shipping your customer's order, that state treats the supplier as a seller with obligations there. Unless the supplier holds documentation proving the sale to you was for resale, many states expect it to collect sales tax on the transaction.

Common reasons a supplier adds tax to your invoices:

• No resale certificate on file. This is the most frequent cause, especially with new supplier accounts.
• Your certificate isn't valid for the ship-to state. You may have given a home-state certificate that the destination state doesn't accept.
• The certificate expired or is incomplete. Missing signatures, permit numbers or product descriptions can make it unusable.
• Supplier policy. Some suppliers collect tax unless they hold a certificate they're confident a specific state would accept in an audit.
• The item isn't covered. Certificates apply to goods you resell, not supplies or equipment you use in your business.

Why This Can Mean Paying Tax Twice

Here's an illustrative example using made-up numbers and a hypothetical 7% tax rate:

• You sell a desk lamp for $60. Your supplier's wholesale price is $25.
• Without a valid certificate, your supplier charges you 7% tax on $25, or $1.75.
• You're registered in the customer's state, so you also collect 7% on $60, or $4.20, and remit it.

The same lamp has now been taxed twice, and the $1.75 comes out of your margin. In states that calculate the supplier's tax on the retail selling price, the overlap can be larger.

Small amounts add up across hundreds of orders. For more on where margin goes, see our breakdown of dropshipping profit margin after payment fees, refunds, and FX.

What to Do When You Spot Tax on an Invoice

1. Check which orders carry tax and which ship-to states they involve.
2. Ask the supplier which certificate it needs and whether it accepts multistate forms.
3. Submit the correct certificate through its portal or account settings.
4. Ask whether it can refund tax already charged on qualifying past orders. Some suppliers will issue a credit once a valid certificate is on file. Others won't.
5. Ask your tax advisor whether you can claim a credit or refund from the state for tax you paid on items you resold. Some states allow this, with conditions.

Getting and Using a Resale Certificate for Dropshipping

A resale certificate (also called a reseller's permit, exemption certificate or certificate of resale, depending on the state) tells your supplier that you're buying goods to resell and will handle sales tax on the retail sale.

How to Get One

1. Register for a sales tax permit in your home state if it has a sales tax, and in any state where you have nexus. Most states require this before you can issue a valid certificate.
2. Get the right form. States publish their own resale certificate forms. Some also accept uniform multistate exemption certificates.
3. Complete it accurately. Forms typically ask for your business name and address, your permit or registration number, a description of the products you'll resell, and a signature.
4. Send it to each supplier. Many dropshipping suppliers and wholesale platforms have an upload process in account settings.

Using It Correctly

• Use it only for inventory you resell. Using a resale certificate for business supplies or personal purchases is misuse, and states can impose penalties.
• Track expiration dates. Some certificates don't expire, while others need periodic renewal.
• Keep copies. Record which certificate each supplier holds, for which states, and when you sent it.
• Update suppliers when details change, such as a new legal entity, address or permit number.

States That Don't Accept Out-of-State Resale Certificates

This step trips up many remote dropshippers. States don't all treat out-of-state certificates the same way:

• Some accept out-of-state registration. A supplier can accept your certificate showing a permit number from your home state.
• Some accept multistate forms, sometimes only for specific purchase types.
• Some require in-state registration. To issue a valid certificate in these states, you generally must be registered for sales tax there, even if you'd otherwise have no reason to register.
• Some states have no statewide sales tax, so you can't get a resale permit from them. If you're based in one, you may need to register elsewhere to give suppliers a certificate they'll accept.

If a ship-to state won't accept your certificate and your supplier has nexus there, you generally have three options:

1. Register in that state. This lets you issue a valid certificate, but it also creates filing obligations. It makes the most sense if you already have, or soon will have, nexus there.
2. Accept the tax as a cost of goods for orders shipping there, and price accordingly.
3. Change sourcing for that state to a supplier without nexus there. Do this only after confirming with an advisor, because the details matter.

Because each state sets these rules, verify with each state's revenue department, and ask your suppliers which forms they accept for which states.

Do Dropshippers Pay Sales Tax? Collecting Tax From Customers at Checkout

Dropshippers usually don't pay sales tax out of pocket on the retail sale. They collect it from customers and remit it to states where they're registered. The tax was never your money. You hold it for the state.

Setting up Collection

• Register first. Collect tax only in states where you hold a permit, and register before you start collecting.
• Configure your storefront. Platforms such as Shopify, WooCommerce and BigCommerce have tax settings or apps that calculate rates by ship-to address, including local rates.
• Set product taxability. Common dropshipping categories, such as apparel, supplements, pet food and digital add-ons, may be taxed differently by state.
• Decide how shipping is taxed. Some states tax shipping charges and others don't, sometimes depending on how shipping is shown on the invoice.
• File on schedule. Each state assigns a filing frequency, and many expect a return even in periods with no sales.

If You Sell Through Marketplaces

On many large marketplaces, state marketplace facilitator laws require the marketplace to collect and remit tax on your behalf. Sales through your own storefront are different. There, you're the seller, and collection is your responsibility.

Keep Tax Separate in Your Payment Records

Card processors generally pay out the full transaction amount, including sales tax. Percentage-based processing fees are usually calculated on that full amount too. A few practices help:

• Record tax collected as a liability, not revenue.
• Reconcile processor payouts against your tax reports each period.
• Track refunds closely. When you refund an order, the tax you refund usually reduces what you owe, but only if your records match.
• Ask your advisor how to treat tax on orders lost to chargebacks.

Accounting integrations help with that reconciliation. MannyPay offers a QuickBooks integration, along with Shopify payment integration and WooCommerce payment processing options. For the broader setup, see our guide to setting up ecommerce payment processing for your online store.

Overseas Suppliers and Sales Tax

When your supplier is outside the U.S., the picture changes:

• Foreign suppliers rarely collect U.S. sales tax. They typically have no state registration, so there's no tax line on the invoice and usually no resale certificate to provide.
• Your collection duty stays the same. If you're registered or have nexus in the customer's state, you still collect and remit tax on the retail sale.
• Duties and tariffs are separate. Import duties, tariffs and customs fees are federal and international charges, not state sales tax, and certificates don't affect them. Changes to low-value import rules have affected many dropshipping stores. Our article on tariffs, duties, and dropshipping chargebacks after de minimis changes covers this.
• Mixed sourcing complicates things. If you use both U.S. and overseas suppliers, track which orders came from which supplier so your cost and tax records match.

How you fund overseas orders affects costs as well. Our comparison of ways to pay overseas dropshipping suppliers covers cards, Payoneer, Wise and wires.

A Practical Sales Tax Checklist for Dropshippers

• List every state where you're registered, plus any where you're approaching an economic nexus threshold.
• For each U.S. supplier, record whether it holds your certificate and which states the certificate covers.
• Audit recent supplier invoices for tax lines and trace each one to a ship-to state.
• Confirm your storefront's tax settings match your registrations and product taxability.
• Reconcile processor payouts, refunds and tax reports every filing period.
• Review the plan with a tax professional at least once a year, or when you add suppliers or sales channels.

Next Steps

Dropshipping sales tax gets easier once you treat each order as two sales. Make sure every U.S. supplier has a resale certificate it can accept for the states it ships to. Register where you have nexus, and collect at checkout wherever you're registered. When a supplier charges you tax, look for a missing certificate or a state-acceptance problem before treating the charge as a cost.

On the payments side, MannyPay supports online stores with eCommerce payment processing for online sellers, payment gateways and storefront integrations. To discuss your store's setup, request a free quote, and a MannyPay specialist will respond within one business day.

ME

About the author

MannyPay Editorial Team

Beyond the Swipe's editorial desk researches the publication's guides and news and cites its sources in every article. Articles reviewed by a named MannyPay editor carry that editor's byline.

This article is for general educational purposes and is not legal, tax or financial advice. Card network rules and state laws change; confirm current requirements for your business.