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I am a Canadian eCommerce seller who drop-ships US products to US customers. Do I need to collect US state's sales tax when my taxes go to the Canada government?

Full Question: I am a eCommerce business who does not carry inventory. We are incorporated in the province of Manitoba Canada and all of our product is shipped from different companies within the United States to states within the United States. We have one supplier who is charging us sales tax because they have a brick and mortar store in California when they ship to my customer in California. Is this legal when they are selling to a foreign company? Do I need to collect California sales tax when all my taxes are paid to the Canada government?

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Answer:

Diane Yetter photoYour question is a drop shipment question. When a seller does not maintain their own inventory and instead relies on their supplier to ship the goods to the seller's customer, the sales tax implications can be challenging. California is one of the states which has very strict rules on the tax on drop shipment transactions. Although your company is buying the goods from your supplier for resale and as such should not incur sales tax on your purchase, this is contingent on the ability to issue a resale certificate to your supplier for the state where the goods are shipped. If the supplier is registered to collect tax in the state where your customer is located, they are required to collect tax on their sale to you unless you have provided them with a valid resale certificate. Many states accept alternative documentation in a drop shipment transaction (and would likely accept your Manitoba PST registration number). However, California will only deem a resale certificate valid if it is a California resale certificate with a California registration number. Since your supplier is registered in California, they are required to charge you sales tax since you are not registered. This tax becomes a cost of doing business to you and you are prohibited from separately stating the tax paid to your supplier on your invoice to your customer. The only way to avoid this tax is to register as a retailer with the state of California. You would then be able to issue a California resale certificate. However, you would also be required to invoice California sales tax on all sales (from any supplier) delivered into California. We have written a book on this matter if you would like more information. Please visit our site to see details regarding Drop Shipments: Taxation, Compliance and Planning.. If you need further assistance we are available to provide sales tax consulting services.

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