Why nexus matters for dropshipping and third‑party fulfillment

Dropshipping and third‑party fulfillment (3PL) change where your goods and operations touch the tax system. After the U.S. Supreme Court’s 2018 Wayfair decision, states can require remote sellers to collect sales tax based on economic activity alone. That means you can trigger sales‑tax obligations in states where you never have a storefront or employees simply by selling enough to meet a state’s economic thresholds or by storing inventory there through a 3PL.

In my practice advising e‑commerce clients, I routinely see businesses surprised by nexus created through third‑party warehouses or by cumulative online sales into a state. The result is often back taxes, penalties, and the administrative burden of registering in multiple states.

Authoritative background: the Wayfair ruling (South Dakota v. Wayfair, Inc., 2018) opened the door for economic nexus standards, and state rules since then vary widely (see FAQ section below). For general federal context on sales and use tax (which is state‑administered), see the IRS overview on sales and use tax (https://www.irs.gov/businesses/small-businesses-self-employed/sales-and-use-tax).

Common ways nexus is created for dropshippers and 3PL users

  • Inventory stored in the state: Many states treat inventory stored at a third‑party warehouse, fulfillment center, or drop shipper as creating physical nexus. If you keep stock in a California or New York fulfillment center, those states commonly require you to register and collect sales tax.

  • Economic nexus (sales or transactions): Most states have economic thresholds such as $100,000 in sales or 200 transactions in a 12‑month period, but thresholds differ by state. Hitting that threshold triggers registration obligations regardless of any physical presence.

  • Personnel: Having employees, agents, or independent contractors in a state (even remote staff or occasional sales reps) can create nexus.

  • Marketplace and facilitator rules: Many states require marketplace facilitators (Amazon, eBay, Shopify, etc.) to collect and remit sales tax on behalf of third‑party sellers. That changes obligations for sellers depending on whether the marketplace collects tax for you or not.

Practical, step‑by‑step compliance checklist

  1. Map where your inventory lives. Document each 3PL location and the dates/quantities stored. States treat third‑party inventory differently, but many consider it a nexus trigger.

  2. Analyze sales by state on a rolling 12‑month basis. Compare to each state’s economic thresholds (commonly $100k or 200 transactions, but check the state rule). Maintain a running tally to detect when you cross a threshold.

  3. Review marketplace facilitator status. If a marketplace collects and remits tax for sales on that platform, you may not need to collect tax for those transactions — but you still need to understand your reporting and exemption documentation requirements.

  4. Register promptly where nexus exists. Registering and collecting moving forward reduces penalty exposure; unregistered periods can generate back tax assessments.

  5. Keep robust records. Retain shipment records, vendor communications with 3PLs, purchase orders, and remittance certificates. States will expect documentation if you claim exemptions or resale certificates.

  6. Use tax automation tools. Tax engines (Avalara, TaxJar, Vertex, etc.) help track nexus and calculate tax rates by jurisdiction. In my advisory work, integrating one of these systems early saves time and reduces errors.

  7. Consult a state tax specialist for audits or complex situations. Nexus disputes (for example, where a marketplace facilitator collected tax but the seller believes they still have responsibilities) can require legal or CPA review.

Real‑world examples (illustrative)

  • Client A (electronics dropshipper): Based in Texas but used 3PLs in California and New York. Because inventory sat in each state’s fulfillment center, they needed to register and remit sales tax to both states. Resolving this required filing returns for prior periods and negotiating penalties.

  • Client B (fashion retailer): Believed only the home state mattered until cumulative online sales into Illinois exceeded the state’s threshold. They needed to register for economic nexus and begin collecting tax on future sales.

These patterns are common: inventory locations and cumulative online sales are the largest nexus triggers for e‑commerce sellers.

How marketplace facilitator laws affect responsibility

Marketplace facilitator laws shift who collects and remits sales tax. In many states, large marketplaces now collect tax at the point of sale and remit it to the state, relieving the third‑party seller of that collection duty for marketplace transactions. However:

  • Marketplace rules vary by state and platform; sellers must confirm which transactions the marketplace taxes.
  • Sales made outside a marketplace (direct on your website) remain the seller’s responsibility.
  • Some states require sellers to still register for certain reporting even if the marketplace collects tax.

Check platform help pages and state regulations to confirm how a marketplace handles collection in each jurisdiction.

Common mistakes and how to avoid them

  • Assuming no tax obligation because you never touch the product: Storing inventory at a 3PL can create nexus.
  • Treating economic thresholds as uniform: Each state sets its own threshold and rules; don’t assume $100k/200 transactions applies everywhere.
  • Ignoring marketplace activity: If a marketplace doesn’t collect tax for certain orders, you could be liable.
  • Poor record‑keeping: Lacking clear documentation of where inventory sat and when makes audits riskier.

Questions sellers frequently ask

Q: Do I have to collect sales tax when using a drop shipper located in another state?
A: Often yes — many states treat third‑party warehouses and drop shippers as creating nexus. Confirm with the state’s rules and your 3PL contract.

Q: What if a marketplace collects sales tax for me?
A: For marketplace sales, the marketplace may collect and remit sales tax under state marketplace facilitator laws. You must still verify which transactions are covered and keep records.

Q: How far back can a state audit my sales tax?
A: Audit look‑back periods vary by state; common periods are three to four years, but some states permit longer look‑backs for fraud or late filings. Keep at least 3–7 years of records depending on your risk profile.

Actionable strategies to reduce nexus surprises

  • Centralize inventory decisions: Limit the number of states where you store inventory unless necessary for service speed. Each new warehouse can create a new tax registration requirement.

  • Use a nexus monitoring tool: Many tax engines monitor your state‑by‑state activity and alert you when you approach thresholds.

  • Draft clear 3PL contracts: Require your warehouse provider to disclose where inventory is stored and to notify you of transfers between facilities.

  • Consider pass‑through pricing: Where appropriate, build expected tax collection into pricing or shipping calculations — but get advice before changing pricing strategies.

Documentation and records to retain

  • 3PL statements showing inventory receipts and transfers
  • Sales invoices showing customer location and tax collected
  • Resale/exemption certificates where applicable
  • Marketplace transaction reports that show taxes collected by the facilitator
  • Registration and return filings for each state where you registered

Useful resources and authoritative references

For related content on state sourcing rules and Wayfair‑era nexus guidance, see these FinHelp resources:

Final notes and professional disclaimer

Nexus rules are state specific and change often. In my 15+ years advising e‑commerce businesses, the most effective practice is to combine accurate, ongoing sales/inventory reporting with early consultation from a CPA or tax attorney experienced in multistate sales tax. This entry provides educational information and should not be relied on as personalized tax advice. Consult a qualified tax professional to determine your obligations in each state.