Yes, you do have to pay taxes for dropshipping. It does seem a bit frustrating because dropshipping is itself a method to raise profits. But sadly you do have to pay taxes on dropshipping, and it can prove to be a huge risk to your business if you don’t.
Dropshipping itself can be a handful, but when you have to do taxes for them then it gets even worse. So, a drop shipment is basically a sale of tangible personal property (TPP), where the seller accepts an order from a customer then gives the order to a third party (such as manufacturer or wholesaler), and makes the third party deliver the item directly to the customer.
It all comes down to two kinds of taxes when you do a dropshipping business. These are the income tax and the sales tax.
Income Tax For A Dropshipping Business
Income tax is by far the easiest to explain. If you happen to have a dropshipping business, then the profits that you will earn out of them will be taxed under income tax. This is because the profits are basically your income that you receive. So, according to whatever state you live in, the tax collecting system will be as per their laws. Often times, many states have less income tax, whereas in other states collect quite a lot.
But many smart business owners claim losses initially. This helps them show the government that they did not earn any income, thus, the government does not collect tax from them. This is a fairly popular method to not paying the tax, but when audited the situation does become serious.
Income tax is not really complicated, but it is a crucial aspect of running any one who uses dropshipping in their business.
The next tax that you will have to pay is the sales tax. Let us get a better idea of the sales tax.
Sales Tax For A Dropshipping Business
Sales tax is not too complicated as well if looked at from a simplistic view. It’s just the tax you pay to your State or City to sell goods and services in their jurisdiction.
Now sales tax actually varies from state to state. Every state has its own sales tax. This tax can drop below 2% in certain states, and can also rise upto 5% in others.
Back in the day, there was a terminology used while collecting sales taxes, this was known as Nexus.Legally. Nexus is when you are a very well known presence in the state, only then you are required to collect a sales tax on your goods, and then pay them to the government.
So, Nexus would decide if you are to pay the sales tax or not. But nowadays many state governments have overwritten the law of Nexus and are collecting taxes accordingly.
But many others have not, so this makes us question if we have to pay taxes even if you do no have Nexus?
Well, the answer is very simple, your state should have overwritten the nexus law. You should be a large proprietor or vendor. This is sort of a good news for established businesses, because they would end up paying a very less amount according to their business size in big cities.
Whereas if you are a new dropshipper, you won’t have to pay anything until you get a lot of sales and are established.
But it sure does get tedious to keep track and then note down all the amounts required for paying taxes.
The best solution to this is Shopify dropshipping.
Shopify is an e-commerce platform for small retail and online stores that makes it easier for owners to deal with taxes. So if you happen to own a store which is accommodated with Shopify then this software will automatically collect sales taxes on every transaction your business goes through.
It is a simple and efficient system in play.
From this article, we can conclude that, yes you have to pay two kinds of taxes when you are dropshipping, and it all depends on your income, and business size (in states with nexus). To make taxes easier for you, you can always dropship with Shopify and make profits in no time.