What Tax Do I Need to Pay when Dropshipping with Aliexpress?! [UPDATED VIDEO]



Worry no more! Learn what taxes you need to pay when dropshipping with Aliexpress.
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***TWO IMPORTANT DISCLAIMERS***

* Please note: I am not an accountant. Please do NOT use my advice in-place of an accountants. I always recommend that any new entrepreneur gets their own accountant.

* This video only covers your tax obligations when dropshipping to customers based in the USA, as that is what we teach on this channel (how to start a store and then target USA-based customers).

QUESTION 1: What Taxes Do I Need to Pay When Dropshipping?

When you are dropshipping, there are two types of taxes that you may need to pay:

***Income Tax Obligations***

Everyone is required to pay income tax (unless you live in an income tax haven). You only need to pay income tax on the profit that you made from your store, not the total revenue. You pay income tax to the country that you live in.

So that means that if you live in Canada, you pay income tax to the Canadian government. The same goes for Australia – if you live in Australia, you pay income tax to the Australian government. You do not live in the USA, then you do not pay income tax to it, even though you are selling to USA citizens.

If you do live in the USA then you will be required to obey both the federal and state laws regarding income tax.

***Sales Tax Obligations***

While everyone is required to pay income tax to their local country of residence, not everyone watching this video will be required to pay sales tax. In the USA, you are only required to collect and pay sales tax to a state if you have “nexus” in it.

Nexus is a legal term which means that you have a sufficient physical presence in a state that you now need to collect and pay sales tax within it.

In the USA, the federal government does not require you to collect and pay sales tax. It is handled by each individual state. So to be required to collect and pay sales tax within one, you need to have a sufficient physical presence in that state (nexus).

This means that if you live outside of the USA in another country (such as Australia, UK, India, Canada etc) then it is very unlikely that you have nexus in any USA state. That means you are not obligated/required to collect and pay sales tax on any orders made by USA customers.

If you live in the USA, then you most likely only have nexus in a single state – the state that you live in. However, if you suspect you have a physical presence in another state, for example:

* You rent/own property in another state.
* You have a remote employee in another state.

Then I would strongly recommend going to an accountant and talk to them to find out which states you do have nexus in.

Question 2: How Do I Collect & Pay Sales Tax when Dropshipping?

Once you know which states you have nexus in, you now need to collect sales tax on orders made by customers with shipping addresses within it. If you are using Shopify, setting your store up to collect taxes is very simple, and we have included step-by-step instructions within this video.

Something important to note is that Shopify will automatically calculate taxes for destination based states, which is very helpful.

A destination based state (such as New York) requires you to collect and pay sales tax based upon where the customer you’re dropshipping to lives, not where you live (in comparison to origin based states).

This can get pretty complicated since each city/district has its own taxes! For example, in New York City, the sales tax rate is 8.875%. But in the city of Buffalo, the sales tax rate is 8.75%. You need to collect and pay the right sales tax for each order.

What Shopify does is it will automatically calculate the correct tax based upon where the customer is – making this super simple.

I also recommend using TaxJar (which automatically syncs with Shopify) as it will generate an automated report which will make paying sales tax much easier, plus they also have an auto-file option for most states which makes filing your taxes even simpler.

Got any questions about paying taxes when dropshipping? Please ask them. We aren’t qualified accountants, but we’ll do our best to answer as many as we can.

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34 thoughts on “What Tax Do I Need to Pay when Dropshipping with Aliexpress?! [UPDATED VIDEO]

  • November 11, 2020 at 9:05 am
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    You are from New Zealand? Do you have any information about NZ import duties?

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  • November 11, 2020 at 9:05 am
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    So if you are doing dropshipping from AliExpress and also selling print on demand (Printify) products on your website to US customers then you will have to charge sales tax and pay to concerned states, right? (While you are living outside US and have no nexus).

    Reply
  • November 11, 2020 at 9:05 am
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    Do I need to register as a Sole proprietor or LLC to start my shopify print on demand store?

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  • November 11, 2020 at 9:05 am
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    Very interesting video! I just think the use tax is missing. As I don't need to pay sales tax, my customers are obliged to pay use taxes, aren't they? Could you maybe do a video and explain the process of those @wholesale Ted?

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  • November 11, 2020 at 9:05 am
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    What happens if you select “shipping from US” on AliExpress? Does that change anything?

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  • November 11, 2020 at 9:05 am
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    so if I run an e-commerce website for drop-shipping from India to target US customers I don't need to pay tax, I may correct? @wholesale Ted

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  • November 11, 2020 at 9:05 am
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    Little confused here, so am not domiciled in USA but in UK however my shop targets mainly to USA customers. I am aware we all have to pay income tax from profit but to claify, if customer purchase product say from NY then do I need to add 8.875% sales tax on top of purchase sale price? please clarify.

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  • November 11, 2020 at 9:05 am
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    All of your videos are SO helpful and informative (not to mention covering every question I have about dropshipping). I really appreciate how to the point they are. Thank you!!

    Reply
  • November 11, 2020 at 9:05 am
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    What if you are an international student in the USA, and sell products in the USA where do I pay tax too?

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  • November 11, 2020 at 9:05 am
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    So sales tax depends on where you and the customer live in? Say I live in California then I have to pay sales tax for my Californian customers? So if someone from New York purchases then I don’t have to pay sales tax?

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  • November 11, 2020 at 9:05 am
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    Hello Sarah, has this rule changed again? Seems like everytime I go to purchase an item in Aliexpress for a customer I am charged a sales tax for that state?

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  • November 11, 2020 at 9:05 am
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    Even if you didn't pay taxes for saying you are in a tax haven you have to pay whole a lot of duties and custom clearing charges

    Just saying

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  • November 11, 2020 at 9:05 am
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    I just want to specify that the nexus mentionned in the video in no longuer the one to be considered. Instead, since 2018 (june, july or august), the nexus is considered to be a business presence in the state. And this business presence varies from state to state. Some will consider that you need to sell more than 100 000$ in the state, while some other might ask for 50 000$ or 300 000$. Some, instead, might ask for a specified number of sales, like 200 or 500. Some states will ask for both… To make it easier for you , you should consult the Taxjar website. It's an application to use with your store and they provide very useful information about USA sales taxe.

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  • November 11, 2020 at 9:05 am
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    Is the drop shipping supplier a nexus? What if they collect sales tax from me?

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  • November 11, 2020 at 9:05 am
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    Lol I’m so scared to start dropshipping cuz I feel I’ll mess up on taxes, I’m just gonna keep track of everything and get a cpa this shit is so confusing especially because only half the information applies to me because I don’t live in America

    Reply
  • November 11, 2020 at 9:05 am
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    So if I spend 1000$ on advertising and in turn make 2000$ in sales, and let’s say I profit 400$ from that do I need to pay taxes on the 400$ or 1400$ (net revenue) because if you pay taxes on the net revenue that gives you a really slim profit margin… and in talking income tax btw

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  • November 11, 2020 at 9:05 am
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    Brilliant video, Sarah. Thank You so much! Do you mind if I embed it into the post I'm writing on Dropshipping and Sales Tax? I don't think I can explain it better than you just did.

    I'm in South Africa so I had to do further research on VAT and Dropshipping. It appears that I have to add VAT for South Africans, not for others – luckily most of my audience is in the States and I have no Nexus there.

    I think it's time to hire an Accountant because I want to sell my own digital products too and I suspect it's going to get complicated. I never considered that I may have to be registered as a VAT Vendor before. Eek.

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  • November 11, 2020 at 9:05 am
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    Please let me know if you know the answer, what if I am an american citizen but I have german residency and am currently leaving here? Do I pay the income taxes to Germany or America? Please let me know🙏🙏

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  • November 11, 2020 at 9:05 am
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    what if I live in Australia (student visa) and my citizenship is from another country ? Who do I pay taxes to ?

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  • November 11, 2020 at 9:05 am
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    Wow! So complicated. You are really helping people. I live in Canada though and I have not started but I want to know what I need to pay.

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  • November 11, 2020 at 9:05 am
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    In NY city theres no tax under $110 i believe..only on accesories tax is collected..then what to do?

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  • November 11, 2020 at 9:05 am
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    Hey Sarah, let's say you're a US resident, and you don't have any physical store nor products to sell, just referring customers to AliExpress store and getting this tiny commission as a drop shipper, and that eBay and Paypal charge you their fees, so do you still have to pay taxes? and do you need a selling license, or permit or you just pay taxes using your social security number?
    Thanks.

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  • November 11, 2020 at 9:05 am
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    Hey Sarah! My store is in the US but if I want to sell to Canada too do I have to pay taxes for the products?

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  • November 11, 2020 at 9:05 am
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    🙄Still do not get it as I want to dropship my products in India(not USA) and I am also living in India. I am 17 years old starting with budget of $35 so that is why I am 😥worried about taxes as I do not have money to overcome penalty.please explain me about this if you can🙏🙏🙏

    Reply

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