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Drop Shipping

Drop Shipping

For information on reflecting shipping charges in your tax calculation, go here.

“Drop Shipping” is more of a business process to define vs. a technical one – one that will require the talents of your company's tax attorney and/or accountant to define what your nexus liabilities and responsibilities are for the origin and destination locations.

Note: Avalara cannot provide recommendations or advice regarding how your company should handle nexus liabilities – this is ultimately the responsibility of your tax attorney or accountant.

What needs to be defined (in advance) is if a “nexus event” is taking place or not. To illustrate a drop shipping scenario, the following example will be used:

  1. A customer orders a desk and a chair from your web store totaling $1,500.
  2. There is a shipping and handling charge totaling $50 ($25 fee for each - not related to Origin or Destination)
  3. The desk ships from your warehouse in Phoenix (where you have nexus liability),
  4. The chair however is drop shipped from a partner company with a warehouse in New London, CT. (where you do not have nexus).

How does tax get calculated? Below is what is known so far:

LineNo TaxCode ItemCode Description Qty Amount DestAddress OrigAddress
1 PRO50204 Desk Office Desk 1 $505 320 S Boston Ave, Tulsa, OK 74103-3703 6850 W Buckeye Rd, Phoenix, AZ 85043
2 PR000000 Chair Ergonomic Chair 1 $995 320 S Boston Ave, Tulsa, OK 74103-3703 375 Connecticut 12, Groton, CT 06340-2947
3 FR020100 Shipping (Desk) Shipping / Handling Phoenix, AZ 1 $25 320 S Boston Ave, Tulsa, OK 74103-3703 6850 W Buckeye Rd, Phoenix, AZ 85043
4 FR020100 Shipping (Chair) Shipping / Handling New London, CT 1 $25 320 S Boston Ave, Tulsa, OK 74103-3703 375 Connecticut 12, Groton, CT 06340-2947

The results of this invoice were as follows:

Description Qty Amount Taxable Tax Totals
Office Desk 1 $505 Yes $43 $548
Ergonomic Chair 1 $995 No $0 $995
Shipping Phoenix, AZ 1 $25 Yes $5 $30
Shipping New London, CT 1 $25 No $0 $25
Order Total $1,598