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We own an eCommerce website and are situated in Canada. Our drop-ship suppliers are all in US and we sell only to US. We do not not charge sales tax. Is this legal?

Full Question: We own an eCommerce furniture website and are situated in Quebec, Canada. Our suppliers are all in the US and we sell only to US customers. Products are drop-shipped directly from the suppliers to the customers. We are not registered in any state to collect sales tax nor do we have nexus in these states. When our suppliers ask us to supply a tax id, we give them our PST/GST number. Our suppliers do not charge us sales tax and we do not charge it to our customers. Is this legal and if not, who is responsible to collect the tax? Should we apply for an ITIN? Would this exempt us and also be used in place of a tax id? Would it obligate us to fill out a tax return for the US? Thanks!

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Answer:

Diane Yetter photoAs long as your business does not have any presence in the US through either your own activities or through others operating on your behalf, then you are correct that you do not have nexus in the US for sales tax purposes. However, there are activities that could establish nexus for you that may create nexus that is common with eCommerce businesses. A few of these include using independent agents to deliver and install or repair the items you sell. If all your products are drop shipped by your supplier and this delivery is by a common carrier, then this likely will not create nexus. However, given the nature of your product - furniture - we often find that there are installation or assembly services that may be offered. If this is the case and the customer pays you rather than the provider, this activity could create nexus. Another common issue with eCommerce operations is the use of a fulfillment agent to house inventory or process orders. If you own the inventory in the US, this could create nexus. One other area that has received a significant amount of press is the "Amazon" or Click Through Nexus rules. This applies in a number of states when a remote seller pays a referral or commission fee to an instate person or company for the referral and successful completion of an order. The states that take this position consider these referral agents are the remote seller's sales agents and create nexus. One other point to keep in mind is that when you are involved in drop shipments there are some states where your supplier if they are registered in the state will be required to charge you sales tax as the only acceptable documentation for a sale for resale is a registration number in the specific state. California is one of these states. So, if you have any customers in CA and your supplier is registered in CA, they will be required to charge you CA sales tax. Most of the states would accept your PST or GST registration number. Some may require you to still fill out their resale form such as New York, but won't require you to be registered in NY. For more information on drop shipments, please visit our site to see details regarding Drop Shipments: Taxation, Compliance and Planning.. Registering with the Internal Revenue Service for a Federal Employer Identification Number (FEIN) will not provide any benefit for sales tax as this is a federal number and all sales taxes are administered at the state level. Whether or not you should register in the US is something you would want to consult with an income tax consultant regarding. If you need further assistance with this matter, please feel free to contact us directly.

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