No one ever talks about taxes when trying to convince you to start a dropshipping store, even though it is a critical element.

Dropshipping provides a way to do online business without the hassle of holding products.

However, just like any other business, dropshipping transactions are liable to taxation. Taxes payable vary across different countries.

Do you know what tax obligations you have as a dropshipper?

If no, read on. In this article, you will learn the nuts and bolts of dropshipping taxes around the world.

Dropshipping taxes

In dropshipping, there are two purchases involved:

  • The customer buys from the seller
  • The seller buys from the supplier

These transactions are viewed and therefore taxed differently across regions.

In the US,

Sales tax

Sales tax refers to what you pay to a governing body on goods you sell within their jurisdiction.

Depending on your location, this body could be a state government or national tax authority. In the States, for example, every state manages its own taxes, including sales tax.

As such, the tax rates vary across states. Some are high, and some non-existent.

Check out tax rates in your state.dropshipping taxes

How does sales tax apply to your dropshipping business?

Charging sales tax in your US-based dropshipping business depends on two scenarios.

  1. Do you have a sales nexus?

A sales tax nexus is when your business has a physical or economic connection to a state.

A physical connection could mean: having a store, storing inventory, having a warehouse, etc.

An economic connection could mean: doing business temporarily in the state, hitting a certain number of sales, etc.

If you have a sales tax nexus in a state, then you must charge a sales tax at the point of sale. In an eCommerce transaction, the point of sale is where the item is shipped to. If you have nexus in a state, you must charge sales tax on all products shipped to buyers within that state.

Orders that you ship outside your state, in this case, are not liable to sales tax because you do not have nexus in that state.

  1. Do you have a sales tax exemption certificate?

A sales tax exemption certificate is commonly known as a resale certificate. It is a state-issued document exempting you as a retailer from paying sales tax to your suppliers.

However, the rules governing sales tax exemption certificates vary from state to state. Also, suppliers reserve the right to reject your certificate. A lot of suppliers do this to avoid any tax repercussions in case your certificate is fake. Some do so to bar resellers from purchasing their products.

You will know if your chosen supplier charges a sales tax when you sign up for a reseller account. Wholesale2B makes this simpler. You can browse products on Wholesale2B and read the detail pages to find out if they charge sales tax or not.

Therefore, paying sales tax to your suppliers depends on if they do not accept a resale certificate or if the state laws permit it.

Shipping outside the US,

Income tax

Income tax is what you pay as a percentage of your yearly profits. Your profits are considered to be your income. If you do not make any profits, you haven’t made any income and thus do not pay income tax.

Typically, you pay your income tax to the tax body in the country you live in regardless of where your customers are based. If your country has a state-based system like in the US, you pay income tax to the state.

However, income tax applies when you have your business registered in that country. So, if you are not registered, you may not need to file for income tax.

Value Added Tax

If your dropshipping store is selling in the EU, you’ll encounter Value Added Tax (VAT). This tax is levied on the price of a good or service at every stage of production. The tax percentage varies in individual countries across the region.

How does VAT work in dropshipping?

Scenario 1: if your dropshipping business is within the EU and your supplier is also in the EU.

In this case, you may not need to pay any VAT.

Scenario 2: If your dropshipping store is within the EU, but your supplier is outside.

Here, you must charge VAT when you surpass the distance selling thresholds.

However, first, you must register for EU VAT.

Scenario 3: If your dropshipping store is outside the EU.

Like in scenario 2, you will need to register and charge VAT if your suppliers are outside the region. If they are within the EU, you may not need to.

Note: You could choose to operate below the distance selling thresholds and not register or charge any VAT. However, your customers will have to pay it along with import duties when the products arrive.

Since no one likes surprise costs, they will leave some bad reviews for sure. It is, therefore, best to inform them of any potential charges beforehand.

Goods and Services Tax

In some countries like Canada and India, you might have to pay Goods and Service Tax (GST). GST is charged on the sale of goods and services.

How does GST apply to dropshippers?

  1. Suppose you are selling goods to customers within the territory where the tax is charged. In this case, the local or federal GST applies, and you can add it to the goods’ price.
  2. When you are selling your goods internationally. In this case, the GST often will not apply to you.

Furthermore, if your sales are below a certain amount, e.g., $30,000 in Canada, you may not need to pay this tax.

Tip: It helps to research the GST rates and applications in the country you want to ship to. This way, you avoid situations of customers having to pay additional taxes before getting their goods.

Ecommerce tax plugins

Adhering to government regulations when running your dropshipping store can be quite tricky. Tax laws keep changing and so do the rates. What is taxable in one state or country may not be taxable in another.

To keep your business in the right books and avoid legal trouble, you should consider automated tax software.

Ecommerce platforms like WooCommerce and Shopify allow integration with some top tax automation tools. These plugins calculate your taxes for you, depending on your unique situation. However, their in-built tax features are not as advanced as external tax plugins.

Some of the best plugins are:

Tax Jar

The Tax Jar extension offers sales tax calculations, automatic filing, and reports. It conducts monthly updates and manages over 10,000 tax rates. Tax Jar is customizable to give you unique and accurate tax reports for your business.

Installation and enrolment are simple, which will have your store’s tax system ready in no time. The program offers a free 30-day trial. Afterward, it costs $19 a month. Automatic tax filing comes at an extra fee.

With these features, you can focus on your business and not be concerned about defaulting taxes.

Avalara

Avalara is a cloud-based tax and compliance system. The program handles all your tax obligation details, whether it is the state tax or international taxes, which can be such a pain. Its services are available in over 100 countries.

Avalara provides monthly accurate tax calculations, electronic tax filing, etc.

The program is relatively simple to install and use. It charges a yearly fee of $50 and also offers professional services like Tax Advisory, Implementation services, etc.

Quaderno

Quaderno is a tax plugin that helps to keep your tax records intact. It manages invoices and bookkeeping tasks and then generates automated tax receipts on every sale.

The plugin shows real-time tax rates in any country you choose. It is accessible in multiple countries and languages.

Due to the unique nature and location of eCommerce businesses, Querdano is fully customizable to your needs. The plugin is easy to install and use.

Conclusion

Taxation matters for your dropshipping store don’t have to be complicated. With the right information and tools, you can stress less on tax compliance and focus on running your dropshipping business.

Many eCommerce platforms now offer tax support and plugins to help you collect and report your taxes on autopilot.

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