Dropshipping and Taxes: Do You Have to Pay Taxes for Dropshipping?

Here comes the answer: Yes, you do have to pay taxes for dropshipping. It does seem a bit depressing since dropshipping itself is a way to increase profits. Unfortunately, you do have to pay taxes for dropshipping. It can be a huge risk to your business if you don't.

When you start a dropshipping business, it all boils down to two taxes. These are income taxes and sales taxes.

What Is Income Tax

Income tax means you pay tax on a year's profits from a shop. Profit is basically the "revenue" of your business. Of course, if you don't make a profit, you don't have to pay any income tax. In fact, you can often claim your loss as a tax credit.

But all in all, the most important question here is: Where do I pay income tax? The answer is the country you live in.

For example, you pay income tax to the local government. Therefore, if you live in Australia, you will always pay income tax to the Australian government. It doesn't matter if your client is in the US: you don't pay income tax to the US government, you do pay income tax to the Australian government.

There's a rare situation, like in the United States, where you have to pay income taxes to both the federal government and your state. However, if you live outside the US, it's probably none of your business, as most countries have no states.

Fortunately, income tax is not a big burden, and it's pretty simple if you know how it works. But now, there's an even trickier problem: sales taxes.

What Is Sales Tax for Dropshipping

From a simple point of view, the sales tax is not too complicated. This is simply the taxes you pay to your state or city for the sale of goods and services within its jurisdiction. Now sales taxes actually vary from state to state in the US. Each state has its own sales tax regulations and you should consider the best and the worst states for business taxes to find out which one is more tax-friendly

In some states, the tax can be reduced to less than 2%, and in others, it can rise to 5%. The sales tax is a consumption tax applied to the purchase of goods and services. The end customer pays the tax because they are the ones who actually consume the end product.

If you're a new dropshipper, you don't have to pay anything until you get a lot of sales and set up. But keeping track of all the amounts needed to pay taxes does get tedious. The best solution is Shopify dropshipping.

Shopify automatically charges a modest sales tax on orders. This is handy because, in some states, the amount of sales tax you'll have to pay varies depending on the city your customer lives in. Besides that, its over 3,000 apps - the most outstanding feature - can also help with your dropshipping business, and DSers is the top-ranked dropshipping app in the Shopify app store.

Sales Tax and VAT

What's the difference between sales tax and value-added tax (VAT)? Both sales tax and value-added tax are types of indirect taxes - a tax collected from the buyer by the seller at the time of purchase and then paid or remitted to the government on behalf of the buyer. Sales tax and VAT are common sources of confusion in the corporate-tax world.

When an end sale in the supply chain is reached, the retailer collects a sales tax. In other words, the final consumer pays a sales tax on the purchase of goods or services. When buying supplies or materials to be resold, a business can issue a resale certificate to the seller and pay no sales tax. No sales tax is levied until the sale is made to the final consumer, and no tax is levied by the tax jurisdiction.

Compared with sales tax, VAT, on the other hand, is levied on all sellers at each stage of the supply chain. Suppliers, manufacturers, distributors, and retailers all charge VAT on taxable sales. Similarly, they all pay VAT on their purchases.

Businesses must track and record the VAT they pay at the time of purchase in order to get a VAT credit on their tax returns. Under a VAT system, tax jurisdictions receive tax revenue throughout the supply chain, not just at the point of sale to the end consumer.

Since 1^st July 2021, some major changes to the rules governing VAT and tariff treatment of goods sold and shipped to customers in the European Union happened. The changes, which focus on personal and e-commerce transactions, will affect businesses and online shoppers. They could also affect Business to Business (B2B) imports and businesses that operate travel agency margin schemes and flat rate schemes.