As with any other ventures, dropshippers are obligated to pay taxes to stay in the legal field. The failure to meet tax-related requirements results in legal consequences, like fines, lawsuits and eventually stopping your shop operations entirely. To avoid that, you need to clarify for yourself the relationship between dropshipping and taxes. Many people perceive taxation as such a complicated and tangled matter, that they do not risk creating their venture, being afraid, that they fail to keep up with the multitude of requirements. But actually, no need to worry. With dropshipping, understanding and fulfilling the tax requirements is easier than with many other forms of business. Below we will explain the basics of dropshipping taxes and then go into some specifics of paying them in various regions of the world.
In general, there is a short answer on the question, do dropshippers pay taxes or not. The majority of stores need to deal two main types of taxes. The income tax is defined based on the profit your business gained within a year. It is probably already familiar to you. If you are employed at some organization and receive your salary there, you pay some percentage of it as your income tax. The sales taxes for dropshipping are determined the same way, based on the total cost of everything you have sold. Along with the described taxes, you may also face some other obligatory payments, for example, custom duties, if you sell your product abroad.
The specifics of paying various types of taxes depend on your residence country, and sometimes it even can vary from region to region. Let’s describe these differences. Dropshipping involves two kinds of legal relationships: first your order some goods from your supplier and then sell them to the end client. Both processes can result in charging some taxes, depending on where all participating parties are located.
Paying Taxes In The US
The income tax for dropshipping in the US is not complicated to handle, because it is paid in the country where you live. Sometimes, more complicated demands apply, for example, if you retain citizenship in one country but live in another for the long period of time. In such cases, the best course of action is to consult a professional accountant. In other cases, paying income tax dropshipping is pretty simple. It is worked out as the percentage of your gross income during the year. The receiver of the payment is the government of the country where you live. In the US, the payment can go both to local and federal government.
Paying sales dropshipping tax US is more complicated, as the rules are set by local state government and vary across the country. Each state sets the tax rate, and the difference can be drastic. In some places 11% are charged, and in some the government sets it to zero to stimulate local businesses. Looks convenient, but the business can choose such a beneficial state to pay taxes, only if it has a physical presence there, such as an offline store.
Paying dropshipping sales tax is even more tricky. You do not have an offline store or warehouse, so your physical presence is considered to be in the state where you live. Moreover, one may be eligible to get the tax exemption, because the dropshipper does not produce their own goods, but buy some products for resale. To use this opportunity, a resale certificate should be obtained. There are in-state-issued papers of this purpose and multistate ones, which are accepted in many states. The dropshipper has to present the certificate to the vendor to prove, that the vendor is not required to charge the sales tax from them.
The rules of charging sales taxes to the end customer are also defined by local officials. It is especially tricky in the case of dropshipping, because you do not have a physical shop and ship to customers in other states and abroad. In general, the tax rate and the right way to process it depends of the location of all three participating parties.
Selling In the European Union
If you want to drop ship to Europe or live in the EU and want to create a business there, you have to familiarize with another new concept – the VAT, which is an abbreviation for a value added tax. It is charged for all purchases of various goods in the region. The taxation rules vary depending on what parties are involved in the transaction. In B2B relationship (between dropshipper and supplier), such dropshipping taxes Europe are paid, only if the dropshipper is situated in the EU.
For registering VAT in the B2C relationship (between dropshipper and the end customer), before 2021 the distance selling thresholds were applied. If you were situated outside of the EU while selling your goods to the customers in the EU countries, you had to pay VAT, only if the gross sum of your sales exceeds the limit, which was different for many EU countries. In 2021 the laws were simplified and these limits for paying dropshipping VAT Europe were removed. Instead, the following EU-wide rules were introduced.
- The limit now is set at 10 000 euros for the whole EU territory. After exceeding the limit all remote sellers should register to pay VAT in the residence countries of their customers.
- Moreover, alternative method to register taxes was created. Dropshippers can use the One-Stop-Shop system, which was established in 2021. It is a uniform way to report sales for remote sellers situated outside of the EU.
- If the dropshipper is situated outside of the EU, they are also subjected to customs fees and must register with the Import-One-Stop-Shop system.
This means, that the One-Stop-Shop system, or OSS, simplifies the process of doing their taxes correctly both for EU and non-EU sellers.
Dropshipping Taxes In Australia
The taxes regulation in Australia is pretty similar to what we described regarding the US. In Australia, the Goods and Services Tax, or GST exists, which is 10% and is charged on most products. But if you are only starting, probably it is not applied to you. The GST will be charged only if your business turnover comprises more than 75 000 AUD. If it does not exceed its limit, you don’t have to charge the GST to your buyers at all. There are several product categories, which are excluded from GST, such as health-related or educational products. There are separate rules related to digital products as well.
In another case, which is when you are situated in Australia and run a dropshipping business with a turnover above the limit, you need to register for GST and start charging it. The Australian Taxation Office requires commercial ventures to submit reports each quarter. If you sell to customers residing outside Australia, you must apply GST, only if your product stays in Australia for more than 60 days after the international payment was conducted.
As you see, paying dropshipping tax Australia depends on the size of the business. This offers good opportunities for beginner dropshipping, as they can start their business small-scale and then grow and develop it, without worrying about taxation. Then, after their shop gets traction and increases its customer base and early turnover, they will need to register for GST.
Dropshipping Taxes in South Africa
Similar rules apply if you conduct a dropshipping business from South Africa. You should pay special attention if you import goods from other countries, which is often the case with dropshipping, as you may be working with Aliexpress or other overseas stores. The rules of import and export in South Africa are regulated by the Department of Trade and Industry. You need to check if the product category you are working with is subjected to paying import duty. In addition, you will need to pay income dropshipping tax South Africa, the same way as in the countries described above.
Now you see, when conducting dropshipping business taxes can get complicated. If you are a beginner and deal with all these organizational questions by yourself, you can make an additional investment and hire an accountant, that will do it for you. It is also worth noting, that some dropshipping services, such as Shopify, simplify paying the sales tax for their clients. The difficulty level of paying your taxes significantly depends on the characteristics of your business. Consider the following questions:
- What types of goods do you sell and are there any special requirements for their selling and delivery, especially when working with sellers and customers situated abroad?
- What is the estimated turnover of your business?
- Do you want to service primarily to the customers in your country or to ship abroad?
- Do you want to work with suppliers and buyers from other regions?
- What type of commercial entity have you chosen for your business?
By answering these questions, you will get a clearer picture of what paying taxes will look like and to what extent can it cause complications. Even if you do not plan to hire an accountant to manage all these things by yourself, we advise you to get a legal consultation at least once, before your set up your store. This way, you will be sure that you have not missed anything. Moreover, you will get a clearer picture of all sorts of legal intricacies you may face, so you have a solid base to work from. This also means, that when you choose what dropshipping platform to use, consider their additional features, such as simplifying taxes and other obligatory payments. Sometimes, there are country-specific plugins and other tools, which simplify the process of managing your taxes. Otherwise, you can choose to fully stay in control of things and manage taxes by yourself, which is also absolutely possible and will not take much time after you get into the basic process and its specifics for your country.