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Thread: Drop shipping and sales taxes

  1. #1
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    Default Drop shipping and sales taxes

    I'm planning to do a site which will list products from other
    companies who will drop ship orders that we forward to them. We will
    not take possession of any inventory and will essentially act as an
    online sales agent for the drop shippers. We will receive the money
    from customers and pay the drop shippers the net amount after
    deducting our commission.

    The drop-shippers/suppliers are located in many different states and
    tracking each order to collect taxes only in cases where the customer
    lives in the same state as the supplier would be an administrative
    nightmare. Has anyone else dealt with this issue?

    I've spoken to a few people, including a CPA who said that legally,
    all a website needs to do is put some sort of statement on the site
    telling customers that it is their responsibility to pay sales taxes
    on a purchase if they live in the same state as the vendor who shipped
    it to them. If this is true, perhaps there is no actual legal
    requirement that websites collect sales taxes. I just want to be sure
    we're covered so the tax auditors won't come knocking one day.

    If we were a simple e-tailer which stocked inventory and did the
    shipping ourselves, it would be straightforward. Just collect sales
    taxes from anyone based in our state. But since we do neither, and are
    just a sales agent, I'm not sure if that's all we would be liable for.
    The suppliers do not charge us sales tax, since we are not buying
    anything from them. All we get is a "sales commission" (we make it
    clear on our site that we are just a sales agent, not a retailer who
    purchases products wholesale, then resells it).

    I guess an analogy would be ebay. They list auction products and
    merely get a commission for any items sold (however in their case,
    they do not get involved in processing payments and instead, customers
    deal with each other directly). I wonder if ebay is liable for any
    taxes.

    I'm thinking it might be simpler to just consider our site a retailer
    (as if we actually purchased the products wholesale) instead of a
    "sales agent/service provider", get a resale certificate in our state
    and then just collect and pay sales taxes on purchases from customers
    in our state. The only potential issue would then be if this treatment
    is inappropriate since we do not stock or ship the merchandise.

    Thanks in advance for any advice.


  2. #2
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    Default Drop shipping and sales taxes

    "Mark" <plin321@aol.com> wrote in message
    news:nnvtc0p9mf5chc7rif9scppdmkcrkkdfje@4ax.com...
    I'm planning to do a site which will list products from other companies who will drop ship orders that we forward to them. We will not take possession of any inventory and will essentially act as an online sales agent for the drop shippers. We will receive the money from customers and pay the drop shippers the net amount after deducting our commission...
    I'm thinking it might be simpler to just consider our site a retailer (as if we actually purchased the products wholesale) instead of a "sales agent/service provider", get a resale certificate in our state and then just collect and pay sales taxes on purchases from customers in our state. The only potential issue would then be if this treatment is inappropriate since we do not stock or ship the merchandise.
    Liability for sales tax in this type of situation is a question with no
    simple or clear answer. The limits of taxability are defined by the commerce
    clause of the United States Constitution, which courts have interpreted to
    require a "substantial nexus" between a seller and a taxing state to make
    the seller liable for sales taxes. For example, if you are in Ohio and you
    sell to a resident of Wisconsin, Wisconsin can require you to collect and
    remit its sales tax only if your business has a substantial nexus in
    Wisconsin. Absent that it can only collect from the buyer directly (which is
    generally impractical if the buyer is a private person as opposed to a
    business).

    One problem with this is that in many situations there is no case law to
    make it clear what constitutes a substantial nexus. Or some states have case
    law, but they don't agree. Another problem is that each state's tax laws are
    somewhat different, so that if you fall within the "substantial nexus" test
    you still might be liable for tax in one state, and not be liable in another
    state, given exactly the same facts. For example, contracting with an
    in-state service to repair products you sell makes you liable in some
    states, but not in others.

    You definitely should consult either a CPA or attorney who has experience
    with interstate sales, but you'll probably find that you have nothing to
    worry about outside your own state. Reducing the legal issues to their
    crudest form, if another state knows that it has no leverage that would
    enable it to collect from you, it will probably conclude that there is no
    substantial nexus, and therefore won't try.

    Within your state there's a good chance you'll have to collect and pay tax,
    regardless of your position as an agent rather than a seller. Many states
    take the attitude that if there's any plausible way they can find you
    liable, they will, and if you don't like it you can jolly well pay the tax
    and then sue them to get it back. Thus, even if your "not a seller" argument
    is entirely plausible, it may not fly.


  3. #3
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    Default Drop shipping and sales taxes

    plin321@aol.com (Mark) wrote in message
    news:<nnvtc0p9mf5chc7rif9scppdmkcrkkdfje@4ax.com>. ..
    I'm planning to do a site which will list products from other companies who will drop ship orders that we forward to them. We will not take possession of any inventory and will essentially act as an online sales agent for the drop shippers. We will receive the money from customers and pay the drop shippers the net amount after deducting our commission. The drop-shippers/suppliers are located in many different states and tracking each order to collect taxes only in cases where the customer lives in the same state as the supplier would be an administrative nightmare. Has anyone else dealt with this issue? I've spoken to a few people, including a CPA who said that legally, all a website needs to do is put some sort of statement on the site telling customers that it is their responsibility to pay sales taxes on a purchase if they live in the same state as the vendor who shipped it to them. If this is true, perhaps there is no actual legal requirement that websites collect sales taxes. I just want to be sure we're covered so the tax auditors won't come knocking one day.
    That isn't the case at all. A vendor who has presence in a state is
    obliged to pay sales tax to the state and is allowed to charge that
    sales tax to his in-state customers. This creates the illusion that
    the customers are responsible for sales tax, but that is not so.

    Whether an Internet-based vendor has presence in a state such that he
    becomes subject to the state's sales tax laws is debated often and
    hotly. Some states insist that a vendor who uses a drop shipper in a
    state has presence in that state: California and Florida are
    especially aggressive in this.

    Hell hath no fury like a California Board of Equalization audit. You
    need a better CPA.

    --
    Not a lawyer,

    Chris Green


  4. #4
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    Default Drop shipping and sales taxes

    "Christopher Green" <cj.green@worldnet.att.net> wrote in
    misc.legal.moderated:
    That isn't the case at all. A vendor who has presence in a state isobliged to pay sales tax to the state and is allowed to charge thatsales tax to his in-state customers. This creates the illusion thatthe customers are responsible for sales tax, but that is not so.
    Technically yes. But customers who buy from an Internet vendor that
    doesn't collect their state's sales tax are almost certainly subject
    to "use tax" in the same amount. I suspect every state with a sales
    tax has a use tax; New York certainly does.

    --
    If you e-mail me from a fake address, your fingers will drop off.

    I am not a lawyer; this is not legal advice. When you read anything
    legal on the net, always verify it on your own, in light of your
    particular circumstances. You may also need to consult a lawyer.

    Stan Brown, Oak Road Systems, Cortland County, New York, USA
    http://OakRoadSystems.com


  5. #5
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    Default Drop shipping and sales taxes

    On Sun, 20 Jun 2004 11:56:13 -0400, Stan Brown
    <the_stan_brown@fastmail.fm> wrote:
    "Christopher Green" <cj.green@worldnet.att.net> wrote inmisc.legal.moderated:
    That isn't the case at all. A vendor who has presence in a state isobliged to pay sales tax to the state and is allowed to charge thatsales tax to his in-state customers. This creates the illusion thatthe customers are responsible for sales tax, but that is not so.
    Technically yes. But customers who buy from an Internet vendor thatdoesn't collect their state's sales tax are almost certainly subjectto "use tax" in the same amount. I suspect every state with a salestax has a use tax; New York certainly does.
    You are quite right. But in the case where the vendor *is* responsible
    for sales tax, a disclaimer doesn't absolve the vendor of his
    responsibility or transfer the responsibility to the buyer. The state
    agency responsible for sales tax can still audit and nail the
    offending vendor.

    California and Florida are especially aggressive in collecting sales
    tax from vendors who use a drop shipper that ships to in-state
    addresses. (Actually, they may collect from the drop shipper, who can
    then charge the vendor for sales tax they are forced to pay over.)

    --
    Not a lawyer,

    Chris Green


  6. #6
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    Default Drop shipping and sales taxes

    cj.green@worldnet.att.net (Christopher Green) wrote in message
    news:<9pk4d0l9ema2e9qukn9g8vgci5apgclosd@4ax.com>. ..
    plin321@aol.com (Mark) wrote in message news:<nnvtc0p9mf5chc7rif9scppdmkcrkkdfje@4ax.com>. ..
    I'm planning to do a site which will list products from other companies who will drop ship orders that we forward to them. We will not take possession of any inventory and will essentially act as an online sales agent for the drop shippers. We will receive the money from customers and pay the drop shippers the net amount after deducting our commission. The drop-shippers/suppliers are located in many different states and tracking each order to collect taxes only in cases where the customer lives in the same state as the supplier would be an administrative nightmare. Has anyone else dealt with this issue? I've spoken to a few people, including a CPA who said that legally, all a website needs to do is put some sort of statement on the site telling customers that it is their responsibility to pay sales taxes on a purchase if they live in the same state as the vendor who shipped it to them. If this is true, perhaps there is no actual legal requirement that websites collect sales taxes. I just want to be sure we're covered so the tax auditors won't come knocking one day.
    That isn't the case at all. A vendor who has presence in a state is obliged to pay sales tax to the state and is allowed to charge that sales tax to his in-state customers. This creates the illusion that the customers are responsible for sales tax, but that is not so. Whether an Internet-based vendor has presence in a state such that he becomes subject to the state's sales tax laws is debated often and hotly. Some states insist that a vendor who uses a drop shipper in a state has presence in that state: California and Florida are especially aggressive in this. Hell hath no fury like a California Board of Equalization audit. You need a better CPA.


    Amazon.com's "merchant partnerships" operates in a similar way to our
    website. They list drop-shipper's products and process payments, then
    remit net payments to drop shippers for fulfillment. As indicated in
    the following excerpt, they apparently compute and collect sales taxes
    on all transactions in which the customer ilves in the same state as
    the drop shipper, so perhaps this is the correct or safest way to go.

    I wonder why they didn't take the simpler route of collecting tax only
    on sales to customers in the same state as they (Amazon) are based,
    providing a resale cert to the drop shippers, and ignoring the drop
    shippers' locations. Are there any compelling reasons for a small site
    like mine to treat taxes in the (administratively cumbersome) way that
    Amazon does?

    ---------

    Sales Tax on Items Purchased from Listed Amazon Merchants

    In order to offer you the widest selection and the most convenient
    shopping experience, Amazon.com has teamed with many other merchants.
    Your order may contain items from one or more of these online
    merchants. Each of these online merchants may have different sales tax
    collection obligations, depending upon their business policies and the
    location of their operations. Amazon.com calculates sales taxes on the
    merchants' behalf in accordance with their instructions. These
    instructions vary depending on the tax laws in each state.

    The following is a partial list of merchants selling items at
    Amazon.com which may be included in your order, and the states in
    which they charge sales tax.

    Amazon.com LLC: KS, ND and WA
    Amazon.com Baby, Inc.: KS, ND and WA
    Babiesrus.com, LLC: All states other than AK, DC, DE, MT, NH, OR, and
    WY
    Borders teamed with Amazon.com, Inc.: KS, ND and WA (Note: items
    purchased for in-store pickup at Borders stores are sold by Borders,
    Inc., and may be subject to tax in most states.)
    Imaginarium.com: All states other than AK, DC, DE, MT, NH, OR, and WY
    Magazine Express, Inc.: AL and WA
    Synapse Services, Inc.: WA only
    Toysrus.com, LLC: All states other than AK, DC, DE, MT, NH, OR, and WY
    target.direct: All states other than AK, HI, and VT

    If you have questions about tax on items purchased from these listed
    merchants, please contact Amazon.com Customer Service. For questions
    about sales tax on items purchased from all other merchants, please
    see below.


  7. #7
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    Default Drop shipping and sales taxes

    In article <sbold0padm34akdaj01ub1d4q23m0rprps@4ax.com>, plin321@aol.com
    (Mark) wrote:

    : cj.green@worldnet.att.net (Christopher Green) wrote in message
    : news:<9pk4d0l9ema2e9qukn9g8vgci5apgclosd@4ax.com>. ..
    : > plin321@aol.com (Mark) wrote in message
    : > news:<nnvtc0p9mf5chc7rif9scppdmkcrkkdfje@4ax.com>. ..
    : > > I'm planning to do a site which will list products from other
    : > > companies who will drop ship orders that we forward to them. We will
    : > > not take possession of any inventory and will essentially act as an
    : > > online sales agent for the drop shippers. We will receive the money
    : > > from customers and pay the drop shippers the net amount after
    : > > deducting our commission.
    : > >
    : > > The drop-shippers/suppliers are located in many different states and
    : > > tracking each order to collect taxes only in cases where the customer
    : > > lives in the same state as the supplier would be an administrative
    : > > nightmare. Has anyone else dealt with this issue?
    : > >
    : > >
    :
    : Amazon.com's "merchant partnerships" operates in a similar way to our
    : website. They list drop-shipper's products and process payments, then
    : remit net payments to drop shippers for fulfillment. As indicated in
    : the following excerpt, they apparently compute and collect sales taxes
    : on all transactions in which the customer ilves in the same state as
    : the drop shipper, so perhaps this is the correct or safest way to go.
    :


    Wouldn't all this be simpler if all long-distance merchants (phone,
    internet, mail) were required to collect state sales taxes on all sales
    and to pass the taxes on to the state in which the customer resides?
    Every year I'm faced with a line on CT's tax form to report out-of-state
    purchases that are subject to CT sales tax. As we all know (in theory, at
    least), the purchaser still owes local taxes when the vendor doesn't
    collect them. Just because they aren't part of the purchase doesn't
    really make them go away. I doubt most people report these taxes, but
    they're still owed. (Remember that gangsters from the "golden age" of
    bootlegging served time for tax evasion.) Of course, setting up a central
    computer to calculate what's owed on which purchases, and getting the
    political will to implement this proposal, are non-trivial realities. I
    assume politicians will get attacked for "taxing the internet" or "raising
    taxes," when, in reality, all they are doing is facilitating the
    collection of what's already due.

    Sorry about the rant. This issue, plus eliminating the penny and the
    dollar bill, are some of the topics that really set me off!

    Mark


  8. #8
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    Default Drop shipping and sales taxes

    plin321@aol.com (Mark) wrote in message
    news:<sbold0padm34akdaj01ub1d4q23m0rprps@4ax.com>. ..
    [snip]
    I wonder why they didn't take the simpler route of collecting tax only on sales to customers in the same state as they (Amazon) are based, providing a resale cert to the drop shippers, and ignoring the drop shippers' locations. Are there any compelling reasons for a small site like mine to treat taxes in the (administratively cumbersome) way that Amazon does?
    It works that way in 33 states, but it doesn't work that way in the 13
    states (counting D.C.) that hold the drop shipper to be the actual
    seller of the goods. (5 states have no sales tax.)

    In California, Connecticut, the District of Columbia, Florida, Hawaii,
    Louisiana, Maryland, Massachusetts, Nebraska, Nevada, Rhode Island,
    Tennessee, and Wisconsin, the state holds the drop shipper, not the
    e-merchant, to be the seller. If the drop shipper delivers the goods
    within the state, there has been a taxable sale, so the drop shipper
    must pay (and will demand reimbursement for) sales tax.

    It should be safe to say that the complexities of handling state tax
    issues when you are an e-merchant using multiple drop shippers are
    great enough that you really need to delegate this to a professional
    who understands all the details.

    --
    Not a lawyer,

    Chris Green


  9. #9
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    Default Drop shipping and sales taxes

    Mark.Solomon@Yale.edu (Mark Solomon) writes:
    Wouldn't all this be simpler if all long-distance merchants (phone, internet, mail) were required to collect state sales taxes on all sales and to pass the taxes on to the state in which the customer resides?
    It would be.

    However, as SCOTUS ruled under _Quill_, the states do not have the
    power to lay down such a requirement.

    Congress does have that power. Congress, however, has properly told
    the states that it will not legislatively reverse _Quill_ until states
    drastically simplify their sales tax regimes, both in terms of number
    of tax districts and in terms of the rules on what is subject to tax
    (the idea being to create a sales tax system such that vendors have a
    chance in hell of being able to compute the sale tax on a purchase).

    Some states are willing to harmonize their sales tax regimes to a
    national standard, but many are not, and so we remain where we are.
    And so we should remain, until the states get on the ball and simplify
    their sales tax systems.

    --
    Rich Carreiro rlcarr@animato.arlington.ma.us


  10. #10
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    Default Drop shipping and sales taxes

    "Mark Solomon" <Mark.Solomon@Yale.edu> wrote in
    misc.legal.moderated:
    Wouldn't all this be simpler if all long-distance merchants (phone,internet, mail) were required to collect state sales taxes on all salesand to pass the taxes on to the state in which the customer resides?
    How would that "requirement" be enforced? If I (in New York) call an
    independent bookstore in Seattle and they mail me a book, New York
    has no legal authority to enforce its tax laws on a company that
    does not exist in New York. It has authority over me, which it
    enforces by a line on the annual tax return.

    --
    If you e-mail me from a fake address, your fingers will drop off.

    I am not a lawyer; this is not legal advice. When you read anything
    legal on the net, always verify it on your own, in light of your
    particular circumstances. You may also need to consult a lawyer.

    Stan Brown, Oak Road Systems, Cortland County, New York, USA
    http://OakRoadSystems.com


  11. #11
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    Default Drop shipping and sales taxes

    In article <v12rd096hfufqfsr8s4mlovb9hgjt8bqud@4ax.com>,
    Mark Solomon <Mark.Solomon@Yale.edu> wrote:
    Wouldn't all this be simpler if all long-distance merchants (phone,internet, mail) were required to collect state sales taxes on all salesand to pass the taxes on to the state in which the customer resides?
    It certainly wouldn't be simpler for the merchant to have to worry
    about umpteen thousand difference sales tax rates, and which items are
    taxable in which states (or have different rates from general
    merchandise in which counties).

    I'm probably getting the details wrong (at least for this week); but
    IIRC, in MA, a belt (no buckle) that costs $75 is taxable; a belt
    buckle that costs $50 is taxable, but if you buy both together they
    aren't taxable. In NY, either alone is non-taxable, but if you buy
    both as one item, it's taxable.

    If you have a physical store, it has one location, and you learn the
    rules there. Lots of stores still get it wrong.

    Seth


  12. #12
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    Default Drop shipping and sales taxes

    Mark Solomon wrote:
    In article <sbold0padm34akdaj01ub1d4q23m0rprps@4ax.com>, plin321@aol.com (Mark) wrote: : cj.green@worldnet.att.net (Christopher Green) wrote in message : news:<9pk4d0l9ema2e9qukn9g8vgci5apgclosd@4ax.com>. .. : > plin321@aol.com (Mark) wrote in message : > news:<nnvtc0p9mf5chc7rif9scppdmkcrkkdfje@4ax.com>. .. : > > I'm planning to do a site which will list products from other : > > companies who will drop ship orders that we forward to them. We will : > > not take possession of any inventory and will essentially act as an : > > online sales agent for the drop shippers. We will receive the money : > > from customers and pay the drop shippers the net amount after : > > deducting our commission. : > > : > > The drop-shippers/suppliers are located in many different states and : > > tracking each order to collect taxes only in cases where the customer : > > lives in the same state as the supplier would be an administrative : > > nightmare. Has anyone else dealt with this issue? : > > : > > : : Amazon.com's "merchant partnerships" operates in a similar way to our : website. They list drop-shipper's products and process payments, then : remit net payments to drop shippers for fulfillment. As indicated in : the following excerpt, they apparently compute and collect sales taxes : on all transactions in which the customer ilves in the same state as : the drop shipper, so perhaps this is the correct or safest way to go. : Wouldn't all this be simpler if all long-distance merchants (phone, internet, mail) were required to collect state sales taxes on all sales and to pass the taxes on to the state in which the customer resides?
    It's been suggested, usually by the states with the highest
    sales tax. There is a bill in Congress to approve a compact
    between the various states -- even if the compact is not
    quite complete -- but it has a few problems (at least as
    reported by the lobbyists for the merchants):

    1. Many states have county and/or city sales tax overrides,
    some of which are not determinable even by zip code.

    2. States have different rules as to what is covered by
    sales and use tax. In Arizona, at least, the county
    and city overrides may have different lists of
    exempt items.

    3. Many`states have occassional (or annual) "sales tax
    holidays", during which certain items are not subject
    to sales tax.

    4. Many states require a state sales tax ID in order
    to transmit the sales tax to that state. Unless the
    compact provides for a vendor in state A to distribute
    the sales tax TO state A for distribution to state B,
    they will have to make 45 times as many payments, and
    possibly register in all 45 states.

    Points 1-3 basically require a vendor to be aware
    of the laws and administrative decisions of all
    sales tax states in order to ship to those states.

    Point 4 may require a business to register in each
    state to which they ship, probably subjecting them
    to other laws of that state.

    The idea needs more work -- but the current status
    requires all customers to know the law of THEIR OWN
    state and locality, rather than requiring each shipper
    to know the laws of EACH state and locality.

    --
    This account is subject to a persistent MS Blaster and SWEN attack.
    I think I've got the problem resolved, but, if you E-mail me
    and it bounces, a second try might work.
    However, please reply in newsgroup.


  13. #13
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    Default Drop shipping and sales taxes

    "Seth Breidbart" <sethb@panix.com> wrote in misc.legal.moderated:
    I'm probably getting the details wrong (at least for this week); butIIRC, in MA, a belt (no buckle) that costs $75 is taxable; a beltbuckle that costs $50 is taxable, but if you buy both together theyaren't taxable. In NY, either alone is non-taxable, but if you buyboth as one item, it's taxable.
    You _are_ wrong about New York, but it's not your fault. Taxing
    clothing under $100 is a county option(*) -- or was, until the
    legislature passed a tax bill over Pataki's veto that, among other
    things, forced counties to tax all clothing at the same rate as
    everything else, whether they wanted to or not.

    That provision had a sunset clause for some time this year, but last
    week I got a postcard from DTF saying that it had been extended for
    another four months.

    All of which just goes to prove your point -- it's tough enough for
    people to know what the tax is where they actually operate; it would
    be essentially impossible to know all the thousands of tax rates in
    the country.

    (*) It's worse than that. Until the change, IIRC the state's 4% was
    not due anywhere, but the county tax (which varied by county, up to
    4% max outside NYC) was collected in some counties and not in
    others. So the tax on under-$100 clothing might be anywhere from 0%
    to 4%, while the tax on other goods was 4% to 8%.

    --
    If you e-mail me from a fake address, your fingers will drop off.

    I am not a lawyer; this is not legal advice. When you read anything
    legal on the net, always verify it on your own, in light of your
    particular circumstances. You may also need to consult a lawyer.

    Stan Brown, Oak Road Systems, Cortland County, New York, USA
    http://OakRoadSystems.com


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