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.