Drop shipping allows small business owners and Internet marketers an opportunity to expand their product offerings to include new items that they would otherwise be unable to sell. Simply put, drop shipping is easy, convenient, and typically inexpensive to arrange. However, because drop shipping involves buying, selling, and shipping goods across state and international lines, the potential for confusion exists. Understanding how drop shipping arrangements affect your company will eliminate confusion and improve your already expanding business.

What is Drop Shipping?

The concept of drop shipping is simple and effective. You sell a product to a customer online or through a catalog, forward payment and delivery instructions to the shipper, and they package and mail that product. You never have to worry about storage, damage to products, packaging, or shipping rates. All you need to focus on is selling more items.


Enlisting the services of a drop shipping company does not require any special license from the state or federal government. Working with these types of companies is not an aspect of your business that requires government oversight or involvement. Your specific role with respect to drop shipping does not fall into any government-regulated sector.

Sales Tax

Collection and payment of sales tax, however, continues to remain somewhat confusing as legislation differs from state to state. The majority of states require the collection of sales tax only if the company selling the products has a physical location in that same state. While this concept may seem logical and apparently simple to implement, the real question involves who actually sold the product to the end consumer. Did you sell the product? You advertised it and collected payment, but never actually owned or possessed the goods. Before getting involved with a drop shipper, get the specifics about taxes from a qualified business accountant in your state.

Business License

The government does not require a special license to use the services of a drop shipper, but you will most likely be required to obtain a generic business license from your state or local municipality. The manner in which you ship products to customers does not detract from the fact that you are running a legitimate business, and as such you must file the mandatory documents with your state or local government to operate legally.