We have a customer in Canada who buys from us and has us drop ship to their customer in another state in the US. What are the sales tax requirements in a nexus state and non-nexus state?

First, you should contact the state(s) where you ship your Canadian customer's products to determine if you have nexus - or enough of a physical presence to collect sales tax. You can consult TARN's Resale Exemption Certificate Resource Table for the appropriate contact information.

You also need to know if the state(s) use destination- or origin-based sales tax sourcing (which you can find in Sales Tax Sourcing Rules by State.) . Most states use destination-based sales tax sourcing; taxes are collected and remitted according to tax laws in the jurisdiction where the product is delivered. States with origin-based sales tax sourcing assess taxes according to the laws in the jurisdiction where a product is purchased.

Each state has different requirements. Some states consider companies that have a sales rep or office building located in the state to have established nexus. If your company has nexus in a state you are required to collect and remit sales tax to that state. Pennsylvania says if you drive your own truck into the state to deliver, it constitutes nexus. (Check all the requirements. California, for example, requires companies that have nexus to be licensed to do business in the state.)

Furthermore, the question of resale exemption enters into a drop ship situation. But let's look at the nexus and sourcing questions first.

You have to determine nexus and sourcing.

Scenario 1: You are located in a state with Destination sourcing, and you have NO Nexus in the state where the end user is taking delivery. You are not liable to collect sales tax. The liability resides either with the seller or the customer (use tax).

Scenario 2: You are located in a state with Destination sourcing, and you HAVE NEXUS in the state where the end user is taking delivery. You might be liable to collect sales tax and remit it to the destination state (depending on whether you have or do not have an applicable, valid resale exemption certificate from the retailer - more on this below).

Scenario 3: You are located in a state with Origin sourcing. You might be liable to collect sales tax and remit it to your state (depending on whether you have or do not have an applicable, valid resale exemption certificate from the retailer - see below).

When you have made the above determinations, the other question is whether, since your customer is the retailer who is buying for resale, presents you with an applicable resale certificate covering the circumstances of the transaction. If you have a valid resale certificate, of course, you do not have to charge sales tax.

With NO resale certificate in Scenarios 2 and 3 above, you must charge sales tax and remit it to the appropriate state (yours if you are in an origin-sourced state, the destination state if your state is destination sourced.) If the retailer presents a resale certificate from the destination state, you do not have to charge sales tax-the retailer is exempt. If the retailer presents a retail certificate from a state other than the destination state, then it depends on whether the destination state accepts retail exemption certificates from other states - most, but not all, do.

These are the determinations you must make to know whether you are liable to collect sales tax from your customer the retailer.

Again, it is important to check with each state to learn whether your company has established nexus, the type of sales tax sourcing - destination-based or origin-based, and whether they accept resale certificates from other states.

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