Hey guys and welcome to my blog, so today we’re going to be talking about how is dropshipping taxed? there are some people disagree with paying taxes and others are of course supposed to them. In this article, you’re going to learn what your taxes obligations are? If you were using Chinese Aliexpress Dropshipping which is the main sourcing technique that we teach on this blog, this article is also only going to focus on where your tax obligations are? When selling to customers that are based in the USA, is this is also the focus of this blog, we get a lot of people that email in and ask me; can you make an article about hat my tax obligations are if I sell customers that have based in my country, for example in Australia unfortunately though guys, there are 195 countries in the world, we simply can’t talk about what tax obligations are for each of them, this why we’re going to focus on the biggest country that online sellers sell to and that is the USA by far they had the biggest chunk of sales and online customers.
# Question 1: What dropshipping tax I need to pay?
When drop shipping there are two main types of taxes that you need to pay, the first is income tax and the second is potentially sales tax.
Income dropshipping tax is the easiest so let’s start with that first. How dropshippers pay income tax! For those of you that don’t know it’s a tax that you pay on the profit that your store makes for the year, that profit is your income the same goes if you had a job then you would be paying income tax on your wages, with drop shipping we pay income tax on the profit of our store, so if you don’t make a profit then you don’t pay any income tax, in fact you could often claim your losses as a tax credit. One of the most common tax questions that we get asked here on this blog is; if I live outside the United States but my customers are based in the USA, who I paid my taxes to, do I pay my income dropshipping taxes to the USA government? or do I pay them to the based government? The answer is that you pay it to your government, so if you live in Australia it doesn’t matter if your customers are in the USA, you pay your income tax to the Australian government, you may also live in a country like the USA where you not only have to pay income tax to the federal government but you also have to pay it to your local state as well, if you live in a country like that then yes you were obligated to pay income tax to both the government and to the state, of course if you live in a country like New Zealand where we don’t have states then you don’t need to worry about that and please do not ask me what your local income tax laws are. Let’s move on to the trickier issue which is sales.
# Question 2: What are sales dropshipping tax and do I need to collect and pay it?
For those of you that don’t know sales tax is when the government places a tax on goods or services sold within their jurisdiction, in New Zealand or government that does those tax is called GST, the New Zealand government requires us to collect and pay it to them, in the United State though it’s different, it’s not their federal government, is the president of, that manage sales tax, instead in the USA it is individual states that do this each state can set their own tax rate and they can also within reason set their own tax laws and there some states in the USA that add US sales tax havens, no one is required to collect and pay dropshipping sales tax within them.
But of course if you may have suspected the majority of states in USA are sadly not sales tax havens. In the USA used to be a law that required you to have something called Nexus with an estate before you were required to collect and pay sales tax to it, nexus for those of you that don’t know is a legal term it means that you have a sufficiently large physical presence within a state to be required to collect and pay sales tax to it.
To better explain nexus let’s use an example let’s say that you are a citizen of the United States and you live in Arizona well you have a house in Arizona you live in Arizona that’s pretty big physical presence right, well that means that you have nexus within it and so because you’ve got nexus in it then it meant that you were required to collect and pay sales tax, in the past you only had to pay text to states that you had Nexus.
Let’s say a customer comes to your store who also lives in Arizona and they buy a $15 well you are required to charge and collect sales tax on that order because you have nexus in Arizona, their sales tax rate is 5.6%, so in this case the tax clipped is 84cent, you are required to pay 84cents to the state of Arizona when tax time comes around, but in the past let’s say that you got an order and this time your customer had come from Texas, well you didn’t live in Texas , you owned no property in Texas, in fact you have nothing to do with the state of Texas because you had no physical presence in Texas and you didn’t have nexus in it, the sales tax rate for Texas is 8.2% because you didn’t have nexus in it you didn’t need to collect to pay any sales tax on that order.
The good thing in that if you didn’t live in the USA maybe you live in the UK that usually had no nexus on any state so usually weren’t required to collect or pay any sales taxes for USA customers which were a really nice bonus.
# Question 3: Do I have to pay sales tax to all states?
No it doesn’t South Dakota verse was fear ruling sets two very important precedents, firstly yes it does set the precedent that states are not allowed to pass their own bill that will require out of state vendors to have to collect and pay sales tax, however it’s important to note that until seeds have passes legislature, the old rule still applies and most states have yet to actually do this, so yes does one precedent but it’s another, the South Dakota verse fee of ruling was affirmed by the Supreme Court but that bill was aimed only at large online retailers.
To be eligible under this new law you may either had to be doing over $100.000 a year in sales in South Dakota or be doing over 200 transactions.
When other states passed their own laws they will need to be aimed at large online retailers as well to meet this precedent, if they want to expand it to include everyone a new court case will be required, so here’s the thing if you were new in dropshipping then you were not required to collect and pay sales tax within any state that you don’t have mixed on, so don’t worry about it once you get to the stage of this law impacting you, you will be making more than enough money to hire an accountant to manage all of that for you, and the chances are even all the states have passed their own version of this bill you’re probably only going to be collecting and paying sales tax to small percentage of the states anyway, most likely the larger ones like New York, so let’s calm down and figure out, how most of you should be collecting sales tax by asking yourself one important question; Do I have nexus in any state in the USA?
For most people the only way that they’re going to have nexus in state is if they live in it or if they own property in it, there are some more obscure ways that you can have it so if you suspect that you might be under these clauses you should be sure to seek an accountant and if you live outside the USA and you don’t have nexus in any state then simply don’t worry about it until you start making lost money, this isn’t going to impact you and you can probably go away and leave this article right now but if you have nexus in a state then you are to be collecting and paying sales tax within it, luckily though Shopify makes this very simple, all you got to do is sign in to your dashboard and click set as in the picture below:
On the setting, page click Texas once the page loads come and click on the United States
Next, you’ll need to let Shopify know which states you have a physical presence, then type in the state and select it and you’re your zip code
Shopify will only let you add and text setting for countries that you have a shipping option too, this store only a shipping option enabled to the USA which is why that is the only country that showed up in my list, once you’ve done that come and click on products and open each of your products.
So all you’ve got to do is scroll down to the pricing box and took the checkbox there.
once you’ve done that click save. If you’re eligible for sales tax I recommend that you go and you take it each time you add a new product.
Shopify automatically collects the right amount of sales tax for the order, which is very handy because in some states the amount of tax you need to pay will change depending on what city your customer lives in.
For example, this is very relevant in the state of New York, I went in and did a $10 test purchase in my store and I put in my address for the first purchase to be from the New York City and the second one to be from Buffalo
despite both being located in the state of New York the tax is charged for each were different since not only does the state of New York charge of 4 percent tax on both sales, but each of these cities has their own individual taxes to collect and pay as well, so the taxes for New York city are slightly higher than for Buffalo, but because Shopify automatically calculates for you don’t need to worry about it.
So hopefully meeting your tax obligations seems a little bit less scary, if you like this article about dropshipping tax and you found it helpful and you’d like more articles about creating a real drop shipping business be sure to subscribe to my newsletter so that you don’t miss out any of my articles.