The idea of dropshipping is simple yet profitable. However, there is one area that always concerns new dropshippers and that is dropshipping and taxes. Just like any other business model, even dropshipping has certain taxes applied to it. If you are running a dropshipping store or planning to open one soon, then this comprehensive guide is for you. In this article, we are going to explain how much dropshipping tax needs to be paid and how to manage it.
What taxes do I need to pay?
While dropshipping you will come across two kinds of taxes: income tax and sales tax. Just like that, income tax that you pay while working a nine-to-five job, you have to pay a percentage of your dropshipping income in taxes. The catch here is you pay the taxes only when you are making a profit. No profit means no taxes.
Whom do I pay the income tax?
The calculation is very simple; you pay the income taxes to the government where you are living. Suppose you are located in Australia, then you will pay the income tax to the Australian government. It does not matter whether your customer base is in America or Europe; you pay the income taxes to your local government.
Sales tax is the tax imposed on goods and services by the local government. Some dropshippers find it difficult to understand how the entire sales tax works. You need to acknowledge that even if you are receiving the product from a wholesaler or dropshipping service provider, it is actually for reselling. This means you are not the end-user, and that is why you are not liable for sales taxes. However, to clarify it to your government you will have to file for an exemption certificate.
What is an exemption certificate?
An exemption certificate or resale certificate is necessary when you purchase a product to repay. You should be aware that every country has different rules for sales tax and exemption certificates.
For example, in Europe, if your dropshipping business has made more than 10,000/year, then you are responsible for reporting, collecting, and remitting the VAT.
Europe has also introduced the import One-Stop-Shop (IOSS) that allows the sellers to remit the VAT through a single tax authority.