Sales Tax Rules for Dropshipping Explained

If you’re starting a dropshipping business, one of the most confusing topics you’ll come across is sales tax.

Who collects it?
Who pays it?
And how do you know when it applies?

The truth is, sales tax rules for dropshipping can feel complicated at first, especially if you’re working with multiple suppliers or selling to customers in different states.

In this post, I’ll break everything down in simple terms so you understand exactly how sales tax works for dropshipping, who is responsible for collecting it, and how to stay compliant while running your business.

What Is Sales Tax in Dropshipping?

Sales tax is a small percentage of a retail sale that’s collected by the seller and paid to the state government.

In dropshipping, it works a little differently because there are three parties involved:

The tricky part is determining who charges the tax and when, because the product doesn’t go through your hands, it ships directly from the supplier to your customer.

Why Sales Tax Rules Matter

Understanding sales tax is important for two reasons:

1. Compliance: You’re legally required to collect and remit sales tax in states where you have a tax “nexus.”
2. Profitability: If you accidentally pay tax on your wholesale orders instead of passing it on to your customer, you could lose money on every sale.

The good news? Once you understand how it works, you can set up your system to automate most of it.

What Is a Sales Tax Nexus?

A sales tax nexus is a connection between your business and a state that requires you to collect and pay sales tax.

There are two main types:

• Physical Nexus: You have a physical presence in the state, like an office, warehouse, or employee.
• Economic Nexus: You make a certain amount of sales or number of transactions in a state, even without being located there.

Each state sets its own rules for what qualifies as an economic nexus. For example, most states set the threshold at $100,000 in annual sales or 200 transactions.

If you meet the threshold in a state, you must collect sales tax from customers in that state.

Who Collects Sales Tax in Dropshipping?

Here’s how sales tax typically works in dropshipping:

Now, when you buy the product from your supplier, you should not pay sales tax again. To avoid being double-taxed, you’ll need to provide your supplier with a reseller’s permit (also known as a sales tax exemption certificate).

This certificate tells the supplier that you’re reselling the product, so they don’t charge you sales tax.

Example: How Sales Tax Works in Dropshipping

Let’s say you live in Texas and have your LLC registered there.

When you buy the desk from your supplier, you provide your Texas reseller’s permit so they do not charge you tax.

Later, you remit the sales tax you collected to the Texas Comptroller’s office.

Simple enough, once you set it up properly.

What If Your Supplier Is in a Different State?

If your supplier ships from another state, sales tax rules can get tricky.

Here are the general guidelines:

• If your supplier has nexus in the customer’s state, they might be required to collect sales tax.
• If you have nexus in the customer’s state, you should collect sales tax at checkout and remit it yourself.
• If neither of you has nexus there, no sales tax needs to be collected on that sale.

This is why it’s important to keep track of where both you and your suppliers have nexus.

How to Collect and Remit Sales Tax

If you have nexus in any state, you must:

If you’re using Shopify, you can easily enable tax collection for your nexus states in your settings:

Shopify Admin → Settings → Taxes and Duties → Set up tax collection by state.

Shopify automatically calculates the correct sales tax rate based on your customer’s location.

For filing and remittance, tools like TaxJar, Avalara, or Shopify Tax can help automate the process.

How to Get a Reseller’s Permit

A reseller’s permit lets you purchase products tax-free from your suppliers since you’ll be collecting sales tax from your customers instead.

Here’s how to get one:

Most suppliers will require this before approving your retailer account.

Common Sales Tax Mistakes to Avoid

Many beginners lose money or run into compliance issues because they make these simple mistakes:

Avoiding these mistakes will save you time, money, and legal headaches.

Final Thoughts

Sales tax can feel confusing at first, but once you understand the basics, it’s easy to manage.

To recap:

When you handle taxes the right way, you protect your business, your profits, and your peace of mind.

If you want to learn exactly how to build a profitable, legal, and scalable high-ticket dropshipping business, join my free training at DropShipLifestyle.com/webinar.