Drop shipping looks simple on a storefront, but every order involves two sales and often three states: where the retailer is based, where the supplier ships from, and where the customer lives. Each state answers the sales tax question differently, especially when the retailer is not registered where the customer is. This guide to dropshipping sales tax rules by state compares the approaches of California, New York, Texas and the Streamlined states, with worked examples.
Key takeaways
- A drop shipment has two sales: supplier to retailer (wholesale) and retailer to customer (retail).
- If the retailer is registered in the customer’s state, it collects tax and gives the supplier a resale certificate.
- If it is not, states differ: some accept an out-of-state resale ID, while California can make the drop shipper pay tax on the retail price.
- Marketplace facilitator laws usually shift collection on marketplace orders to the platform.
The Two Sales in Every Drop Shipment
Our drop shipping sales tax compliance guide covers the basics. In short:
- Retail sale: the retailer sells to the customer. If the retailer has nexus in the customer’s state, it collects tax at the customer’s rate.
- Wholesale sale: the supplier sells to the retailer and ships to the customer. If the supplier has nexus in the customer’s state, it needs acceptable resale documentation from the retailer, or it may have to charge tax.
The hard case is a supplier registered in the customer’s state and a retailer that is not. That is where state rules split.
Dropshipping Sales Tax Rules by State
| State | Unregistered retailer’s resale documentation | Result for the supplier |
|---|---|---|
| California | When the true retailer is not engaged in business in California, Regulation 1706 applies | The drop shipper is treated as the retailer and owes tax measured by the retail price; it may use its own selling price plus a 10% markup, or a lower documented markup |
| New York | Qualified out-of-state purchasers may give Form ST-120 without New York registration | No tax if a properly completed certificate is accepted, generally within 90 days of the sale |
| Texas | Form 01-339 resale certificate | No tax with a properly completed certificate; keep it for four years |
| Streamlined states: GA, IN, IA, KY, MN, NE, NV, NJ, ND, OK, SD, UT, WA, WV, WI, WY | Streamlined Certificate of Exemption with an SST ID or another state’s registration number | Drop shipper may accept the out-of-state ID and is not required to verify it |
| Other states | Varies; some require an in-state registration number | Supplier may have to charge the retailer tax on the wholesale price |
State lists change. Confirm each state’s current position before relying on an out-of-state certificate, and see how to verify a sales tax resale certificate.
Worked Examples
Example 1: California drop shipment
An out-of-state retailer not engaged in business in California sells a $100 item to a customer in San Diego (7.75%). A California supplier sells it to the retailer for $60 and ships it.
Measure using the 10% markup: $60 × 1.10 = $66
Tax owed by the drop shipper: $66 × 7.75% = $5.12
Example 2: New York drop shipment
An Oregon retailer with no New York registration requirement gives its New York supplier a properly completed ST-120 for an order delivered to a New York City customer.
Tax charged by the supplier: $0. The customer may owe use tax.
Example 3: Retailer registered in Minnesota
The retailer sells a $250 item to a Minneapolis customer (9.025%) and gives the supplier a Streamlined certificate.
Tax collected by the retailer: $250 × 9.025% = $22.56
Check customer rates with the Sales Tax Calculator or the San Diego, New York City and Minneapolis rate pages.
How Economic Nexus Changes the Picture
Since the Wayfair decision, a retailer that passes a state’s economic nexus threshold must register and collect tax there. Once registered, it gives the supplier an in-state resale certificate, and special drop shipment rules such as California’s no longer apply to its orders. Growing dropshippers should track sales by state monthly and register as soon as they cross a threshold. Our multi-state sales tax registration guide explains the process.
Marketplaces and Drop Shipping
If you sell through Amazon, eBay, Etsy or Walmart Marketplace, the platform generally collects tax on those orders as a marketplace facilitator. Your supplier still needs resale documentation for the wholesale sale. Orders from your own website remain your responsibility. See marketplace vs direct sales tax liability.
Dropshipper Compliance Checklist
- Track sales by destination state and compare them with nexus thresholds.
- Register where you have nexus and collect at the customer’s combined rate.
- Give each supplier the resale form its state accepts, and renew certificates on schedule.
- Review supplier invoices for tax charged on wholesale purchases, and ask why.
- Keep marketplace, website and wholesale sales separate in your books.
- Factor unrecoverable supplier tax into pricing for states where you are not registered.
Conclusion
Dropshipping sales tax rules by state hinge on registration. When the retailer is registered in the customer’s state, the process is straightforward. When it is not, outcomes range from no tax in New York and many Streamlined states to the drop shipper paying tax on the retail price in California. Map your nexus, keep resale paperwork current with each supplier, and revisit your setup as you grow. For freight on drop-shipped orders, see sales tax on freight and shipping charges. Find rates on our state sales tax pages and the Add/Remove Sales Tax Calculator.
Frequently Asked Questions
Who pays sales tax on a drop shipment?
Usually the retailer collects tax from the customer if it has nexus in the customer’s state. If it does not, the supplier may owe or charge tax depending on that state’s rules.
What is California’s drop shipment rule?
Under Regulation 1706, when the true retailer is not engaged in business in California, the California drop shipper is treated as the retailer and owes tax measured by the retail price, which it may estimate using its selling price plus a 10% markup.
Can I use an out-of-state resale certificate for drop shipping?
In many states, yes. Several Streamlined states accept an SST ID or another state’s registration number, and New York allows qualified out-of-state purchasers to use Form ST-120.
Do dropshippers need a sales tax permit?
You need a permit in states where you have nexus, including states where your sales pass the economic nexus threshold or where you are based.
Does Amazon collect sales tax for dropshippers?
On orders placed on Amazon, yes, as a marketplace facilitator. Orders from your own website are your responsibility.