Dropshipping 4 min read
20 Nov 2020

A Beginner’s Guide To Dropshipping Taxes

A Beginner’s Guide To Dropshipping Taxes

The idea of dropshipping is simple and profitable until you start thinking about taxes and other legal formalities.

If you run a dropshipping store or you're planning to start one in the near future, then this comprehensive dropshipping tax guide will help you learn everything you need to know about dropshipping taxes and VAT. 

Dropshipping Business Model Explained

The dropshipping business model has gained immense popularity and fame in recent years. 

With the best eCommerce platforms, such as Shopify, BigCommerce, and Weebly, it has become easier than ever for any person to start his online store, provided that he has a business plan in mind. 

But did you know this successful business model can turn into a nightmare if your business fails to comply with the legal challenges?

If you closely look at the dropshipping business model, you'll see two purchases at play for a single product - the buyer purchases a product from a retailer, then the retailer from the actual vendor. This is confusing, isn't it? When is the sales tax charged, and by whom?

What Taxes Do You Have To Pay If You Run A Dropshipping Store?

There are two types of taxes you may have to pay if you run a dropshipping store - Income tax & Sales tax.

What Is The Income Tax?

Income tax is the amount of tax you pay on your store's annual income. It's the same as paying a  tax on your wage when you have a regular job. 

The money you have to pay as a tax depends on your profit. So, if you don't have a profit, you're not required to pay this particular type of tax. In fact, you can also claim a tax credit if you had a loss in the previous year.  

You pay income tax to your local government. For example, if you live in the US, you'll always pay income tax to the US government. Even if your customers are based in some other country, you'll always pay income tax to your local government. 

In certain cases, you may have to pay tax to both federal and local governments (if you're based in the US). Fortunately, income tax is pretty simple to handle, and it isn't much of a burden like a sales tax. 

What Is The Sales Tax?

Simply put, sales tax is a type of consumption tax. It is levied on the purchase of products and services. 

Since end-users are the actual consumers of the products or services, they're liable to pay this tax. 

As the dropshipping business model slightly varies from the actual retail business model, it oftentimes becomes challenging for your online store to determine who's the actual buyer or consumer of the product or service. 

With dropshipping, the major point of concern is who collects the sales tax from the end-user? Is it you, the retailer, or the vendor? 

Interestingly, there is no answer to this question. Generally, you're not liable to pay sales tax on the purchases you've made for resale purposes. But for this, you'll have to apply for the official exemption certificate. 

What Are Exemption Certificates?

Exemption certificates are also called resale certificates. Every state has its own rules regarding the issuance of this certificate to the retailers. Some states acknowledge certificates issued by the state, while others also accept multi-state resale certificates (a certificate that is accepted by multiple states- 38 states to be precise).

Also, if you're registered through the Streamlined Sales and Use Tax Agreement, your resale certificate will be acknowledged in every member state. 

There are a few important things you must know about the exemption certificates before you start your dropshipping business as a retailer. 

Exemption Certificates Are Only Legally Used When You Purchase Products With the intention To Resell

As a general rule, exemption certificates are only applicable when you purchase stuff from a supplier with the sole intention of reselling it to other people. Here, it is important to understand that each state has its own laws and regulations regarding the issuance and use of resale certificates

Not All Suppliers Will Acknowledge Exemption Certificates

Your supplier reserves the right to accept or refuse your exemption certificate. That's because the supplier is the next in the queue for unpaid sales taxes if the resale certificate submitted by the retailer turns out to be fake. 

Should You Charge Sales Tax From Your Customers?


If you're registered through SSUTA, and you hold sales tax nexus in a state, then you have to collect and remit sales tax in states where you're registered. 

But if you're a dropshipping store, you may need to check out your state laws regarding sales tax and exemption certificates. 

On the other hand, if you do not have nexus in a state, that generally means you're exempt from collecting and submitting sales taxes. 

But again, you might be on the hook for a tax if your vendor is based in the same state as the final consumer. 

While some states consider an in-state vendor to qualify as a nexus for that sale, a few US states have different legal clauses about this particular situation. 

Make sure you always check each state's policy to confirm you and your business are compliant with the legal clauses.


If you're based in Canada, you're more likely to collect and remit goods and services tax, also known as GST. Notably, this tax is charged on each individual phase of production. 

Similar to the US sales tax, GST is levied as a flat-rate percentage. 

Canada currently follows "the place of supply law". This rule determines the tax rate you should follow to collect and pay to the concerned authority. 

Here it's important to understand that determining the place of supply depends on your current location, the types of products or services you offer, and to whom. 

There is no confusion if you're an online store dealing with tangible products. Simply charge GST across the board if you're operating from Canada. Don't forget to check out the Canada tax guide to learn more about how this entire process works. 


Next on our list are the owners who are selling from the EU. 

If you run a VAT-certified business in the EU, and your vendor is also based in the EU, then the reverse-charge mechanism will be implemented on B2B transactions. 

On the flip side, if you run your business from outside the EU and your supplier is in the EU, then you don't have to pay VAT.

You must register your dropshipping business for EU VAT if you're based outside the EU. You can immediately start charging tax once you go beyond thresholds. 

Charging tax from your customers at the time of purchase is extremely crucial. If you don't register your dropshipping store for VAT, then you run the risk of providing poor customer service. 

If your products are being ordered from outside the EU, then the customer might have to pay extra charges and VAT.  Such unexpected charges make up for negative customer experience.

We suggest you follow the distance selling laws in the EU if you're looking to provide the best customer service to your buyers across the board. 

Did you know Shopify automatically collects dropshipping tax on each order? You may have to check out guides on other platforms to see how this collection process works on their platforms. 

Just keep in mind the guides you'll find on each platform highlights the process of sales tax collection on their individual platforms. They do not commit to providing any legal advice. 

According to a Shopify guide," The following reference guide is for informational purposes only and is not intended to replace professional tax advice. If you have further questions about whether tax legislation applies to you, then you should contact US state tax authorities or a tax professional. (Source)

Things To Consider Before You Start And Run Your Dropshipping Store

First and most importantly, you have to ensure that your business is registered. This step is critical, and therefore, we suggest you seek professional advice from an attorney or a tax specialist to learn dropshipping tax laws applicable in your area
The next thing you may want to do is apply for an EIN number. Employee Identification Number is almost the same as the social security number that the IRS uses to identify your business
Last but not least, contact your local city government to find out whether you need a local business license to run your dropshipping store online.

Listen to our podcast with Alan Chen on Tax Filing and Financial Advice for Ecommerce Growth.

Key Takeaways

Similar to your regular 9-5 job, you're required to pay tax on your annual income. You have to pay this amount to your local government, and it has to be paid annually. 

Dropshipping store owners are also needed to collect and remit the sales tax to their local governments. However, if you have an out-of-state supplier with no nexus in the particular state, you're not liable to pay sales tax or VAT on your purchases.


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Ricky Hayes

Ricky Hayes

Ricky Hayes is the CEO at Debutify. He is a passionate entrepreneur running multiple businesses, marketing agencies, and mentoring programs.

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