Drop-Shipping and Sales Tax in the Post-Wayfair World
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Before the Wayfair ruling, drop-shipping companies didn't have to register for sales tax in states that didn’t collect it. In fact, due to their business models, most drop-shipping companies didn’t have to register for sales tax at all.
However, since the Wayfair ruling, these companies are now responsible for registering everywhere across the country that collects sales tax. What’s more, drop-shippers are having to ask for resale certificates in order to protect themselves from vendors that have nexus in different states. So what can these drop-shipping companies do to avoid additional charges and better understand the world of sales tax?
In this episode of the Sales Tax and More Podcast, co-hosts Michael J. Fleming and Ellie Moffat sit down to talk about drop-shipping and sales tax in a post-Wayfair world. Michael discusses how drop-shippers have been impacted by the Wayfair ruling, why there is persisting confusion around resale certificates and his recommendations to drop-shipping companies on how to deal with sales tax. Stay tuned.
Here’s a glimpse of what you’ll learn:
Why drop-shippers have been impacted harder than most when it comes to the Wayfair ruling
The confusion around resale certificates in a drop-shipping scenario
Do companies need to register in every state in order to issue a certificate?
Michael J. Fleming's sales tax recommendations for companies involved with drop-shipping
Where drop-shippers can learn more about sales tax
How to get in touch with Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax & More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
[0:26] Mike: Hi, I'm Mike Fleming, founder of Sales Tax and More and today's co-host of the Sales Tax and More podcast where we talk about everyone's favorite subject, which is of course sales tax. Today my co-host Ellie Moffat is going to be interviewing me about drop-shipping in the post-Wayfair world. Before we get started, let's introduce Ellie.
[0:49] Ellie: Hey everyone, it's great to be here and I'm gonna just do a quick introduction for Sales Tax and More as well. So, Sales Tax and More is a full-service consulting and solutions firm. We have a really great team of experienced tax professionals who are very dedicated to fulfilling any of your state tax-related needs. So we do a lot of returns, registrations, consulting, research, and like our name states more. So if you have questions about our services, please reach out and ask, we will give you plenty of ways to do so. And, Mike, attention back on you here. Why is it that you say drop-shippers have been impacted harder than most companies when it comes to Wayfair?
[1:30] Mike: That's a really great point, Ellie, thanks for asking. You know, drop-shipping has been tough for just about all companies out there, you know, we're all finding that lots of companies have to register and collect tax and more states than they ever have before. And the same thing is true of drop-shippers except you know, drop-shippers may not have had a responsibility to collect in any state if they were located in the state without a sales tax. In theory, they didn't have to collect sales tax anywhere because of the business model. So you've got the, you know, companies that were registered maybe in their home state, maybe in zero states, all of a sudden have to worry about perhaps getting registered everywhere across the country that has a sales tax, you know, 46 states plus Washington, DC. So that's the first thing. But the second thing is that now they have to because all of their vendors also have Nexus in so many more places. Their vendors are asking them for more certificates. So now they have to figure out not only do I need to collect tax but if I don't need to collect sales tax somewhere. What can I provide my vendor so that they don't charge me sales tax on my purchases that are actually sales for resale?
[3:01] Ellie: Yeah, and you know, there's always it seems like there's a lot of confusion around those certificates and the more people ask the more confusion, so why is there so much confusion when it comes to these resale certificates and a drop-shipping scenario, Mike?
[3:17] Mike: Well, a couple of things. Number one, a sale for resale is not recognized as a sale for resale unless it's properly documented. And that's why so much of the problems come in here because each state requires different types of documentation. There's also, you know, a lack of common terminology, you know, some states, you know, talk about wholesalers, and what happens if you're a retailer or if you're a distributor or you know, you know, you use the same language, you know, if they're talking about manufacturers does this apply to you, so lack common terminology is an issue. And then it's, you know, two transactions. And a lot of us look at this as one big long transaction, when in reality, we need to look at it as at least two separate transactions, some drop-some shipping scenarios have multiple parties. But today we're going to keep it simple, just two transactions. And for some reason, our blank minds go blank or a lot of people's minds go blank when they look at this as one big transaction rather than two separate transactions. Another reason why it's pretty confusing is that we forget to use the basics, or we don't know the basics. And the basics are that sales are sourced to wherever the property is being shipped to. So that's number one. And when I say source, that means you know, that's the state's rate that you've got to charge. And if you're going to be providing a certificate, it's also to that state. So it's the delivery state. And, you know, if you're collecting a certificate in lieu of charging a tax then it just stands to reason that that certificate must be acceptable to the delivery state also. So there is a lot of confusion in there, especially when, you know, some companies believe that a sale for resale is a sale for resale. It doesn't matter what documentation that I give you. Unfortunately, it matters a lot, because if it's not properly documented, the state's not going to treat it as a sale for resale. So that's why you know, your vendors are being a little bit tougher than they used to be. They don't want to have to pay the tax for you. So they want to either make sure they collect a valid certificate or they must charge you the tax.
[6:02] Ellie: Yeah, Mike, but when you're talking there, I was just thinking about the people that have come to us so confused, not knowing where to start. There are so many people out there who just have no idea what to do, especially drop-shippers. So Mike, do companies need to register everywhere in order to issue a certificate?
[6:24] Mike: This is a common mistake. Sometimes, you know, one of your vendors will have been audited, or they, you know, know of someone who's been audited or all of a sudden a light bulb comes on, and they realize they need to be collecting these certificates everywhere. So they start telling their customers, they need to run out and get registered everywhere. And unfortunately, that's just not the truth. You only need to be registered wherever you have Nexus. Let me back up there. There are some states like California, and there are, you know, 10 of these types of states where in order to issue a valid certificate, you must be registered. But if you don't have Nexus in 36 states, there's some sort of alternative documentation that you can provide your vendor that they should be able to accept, and it's going to protect them and allow them to not charge you the tax. So this is what we call alternative documentation. It will only work in states where you don't have Nexus if you have Nexus, then you must get registered in order to issue a valid certificate. And then as I was mentioning, you know, there are 10 states you know, California is one, Tennessee's and other Connecticut's a third, Maryland, the state of Massachusetts, Washington, DC, the state of Mississippi, state of Ohio and then depending on the circumstances the state like Florida and Louisiana, you may have to be registered there in order to issue valid certificates also. So big a fallacy that you get run out and get registered everywhere. You know, if you have Nexus everywhere you should be, you know, getting registered and to collect and remit sales tax anyway. But you don't have to do so if you don't have Nexus and still, you can still provide that vendor with the documentation.
[8:34] Ellie: Thank you so much for that Mike. And I think this is the beginning of some, some information that we also have in other places, and I'll just do a little plug here for the webinars we also offer but what recommendations do you have for companies involved with drop-shipping?
[8:51] Mike: Well, one is knowing the basics. So as Ellie was mentioning, we've got some great webinars where we go over the basics, and once you understand the basics, you'll know what you can provide to your vendors and the vendors can know what they can accept. So, education is key. You know, we as both sides of the equation need to be up to speed on knowing what types of alternative documentation they can either issue or what types of alternative documentation and then what circumstances they can accept this, that takes away a lot of the friction, you know, if you can show your customers that you're working with them and that you're showing them all of this other documentation making their life easier, not telling them they need to go out and register everywhere. It's, it just makes the whole transaction go smoother, because if you're giving your customers a hard time they're going to be looking elsewhere to take that business, or they're going to end up getting registered and they're going to end up paying, you know, more tax than they should. So if you're the actual retailer in this situation, you got to know what you can give. And if you're still at an impasse, sometimes you bring in a third party someone like us where we can explain to the vendor why, you know, this alternative documentation will work. Or we come in on the side of the vendor and we try to talk to the customers, you know, independent third parties and say, Hey, you know, they're not trying to be tough and make your life tougher than it needs to be. Here's why they're asking for this. And in order to protect them in order to protect you because they may come after you two, three years down the road. If they do get audited. A lot of sellers you know, go to their customers and say we should charge tax on this. You gave us the wrong certificate. And that just ruins relationships. So to prevent all of this, knowing this alternative documentation is very important whether you're, you know, a retailer utilizing a drop-shipper or whether you are drop-shipping for your customers. This education is paramount.
[11:21] Ellie: So Mike, where can people go to find this education? Are there any resources that you recommend?
[11:27] Mike: Yeah, to learn the basics, there are lots of webinars out there. As we mentioned, we have a free webinar that goes over a lot of this. We also, you know, have a chart, it's not on the free portion of our website. We do have many, many charts in the free portion of our website. But we also have what we call the SALT vault. And that's the premium portion of our website. There are lots of charts and matrices there. And this is one of the charts and matrices that we do have in our SALT vault. We'll list all of the states out there. And all of the different types of alternative documentation that could be used. Whereas you know, a retailer does not have to go out and get registered. As long as they don't have Nexus, they can issue one of these alternative documents, and the seller will not have to charge them tax. So that's a great resource there. It's the only resource I know of that has all of this information in one place.
[12:32] Ellie: Thank you so much, Mike, for your time for your recommendations here. And really appreciate you I enjoy being on this podcast as well. Do you want to close out with some information on how people can get in touch with us?
[12:47] Mike: Yeah, absolutely. So our website is www.salestaxandmore.com it's all spelled out, salestaxandmore.com. Plenty of ways where you can utilize the free resources that I talked about. You can also see the SALT vault there. And there are ways that you can submit your information to talk to someone here or they want to take a shortcut, Ellie, they can always email you at emoffat@salestaxandmore.com. So thank you, everyone, and we look forward to talking with you on the next podcast.
[13:33] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.