Question one: what taxes do I need to pay when dropshipping?
When dropshipping, there are two main types of taxes that you need to pay.
The first is income tax, and the second is potentially sales tax.
Income tax is the easiest, so let's start with that first.
How do dropshippers pay income tax?
Income tax, for those of you that don't know, it's a tax that you pay on the profit that
your store makes for the year.
That profit is your income.
The same goes if you have a job.
If you had a job, then you will be paying income tax on your wages and with dropshipping,
we pay income tax on the profit of our store.
So if you don't make a profit, then you don't pay any income tax.
In fact, you can often claim your losses as a tax credit.
One of the most common tax questions that we get asked here on this channel is this:
if I live outside the United States, maybe I live in Australia, but my customers are
based in the USA.
Who do I pay my taxes to?
Do I pay my income taxes to the USA government or do I pay them to the Australian government?
The answer is that you pay to your government, so if you live in Australia, it doesn't matter
if your customers are in the USA, you pay your income tax to the Australian government.
You may also live in a country like the USA where you not only have to pay income tax
to the federal government, but you also have to pay it to your local state, as well.
If you live in a country like that, then yes, you are obligated to pay income tax to both
the government and to the state.
Of course, you can live in a country like New Zealand where we don't have states and
you don't need to worry about that.
Ad please, please, please do not ask me what your local income tax laws are.
I get asked questions like, "Sarah, what are my tax obligations if I live in Iceland?"
Honestly, though, I don't know because I live in New Zealand.
I don't live in Iceland.
I don't know every country's income tax laws, so please, please, please do your own research
here.
So, that's your income tax obligations.
Let's move on to the trickier issue which is sales tax.
Question two: what is sales tax and do I need to pay it?
For those of you that don't know our sales tax is when a governing body places a tax
on goods or services sold within their jurisdiction.
In New Zealand, it's our federal government that does this and our sales tax is called
GSTE.
The New Zealand government requires us to collect and pay it to them.
In the United States though, it's different.
It's not the federal government, i.e. the one that Donald Trump is the president of
that manages sales tax.
Instead in the USA, it is individual states that do this.
Each state can sit their own tax rate and they can also within reason set their own
tax laws.
And there are some states in the USA that thus sales tax havens.
No one is required to collect and pay sales tax within them.
Yay.
But of course, if you may have suspected, the majority of states in the USA are sadly
not sales tax havens.
Now, here's where things have changed from my previous video.
In the USA, there used to be a law that required you to have to have something called nexus
with an estate before you were required to collect and pay sales tax to it.
Nexus, for those of you that don't know is a legal term, it means that you have a sufficiently
large physical presence within a state to be required to collect and pay sales tax to
it.
To better explain nexus, let's use an example.
Let's say that you are a citizen of the United States and you live in Arizona.
Well, you have a house in Arizona.
You live in Arizona, that's a pretty big physical presence, right?
Well, that means that you have nexus within it and so because you've got nexus in it,
it means that you are required to collect and pay sales tax.
In the past you only had to pay tax to states that you had nexus in.
So let's say a customer comes to your store who also lives in Arizona and they buy a mug
for $15.
Well, you are required to charge and collect sales tax on that order because you have nexus
in Arizona.
Your sales tax rate is 5.6%.
So in this case here, the text to collect is 84 cents.
You are required to pay this 84 cents to the state of Arizona when tax time comes around.
But in the past, let's say that you got a second order and this time your customer had
come from Texas.
Well, you didn't live in Texas.
You owned no property in Texas.
In fact, you had nothing to do with the state of Texas.
Because of this, you had no physical presence in Texas, and thus you didn't have nexus in
it.
The sales tax rate for Texas is 8.25%, but because you didn't have nexus in it, you didn't
need to collect and pay any sales tax on that order.
This meant then that if you didn't live in the USA, maybe you lived in the UK, that you
usually had no nexus in any state, so you usually weren't required to collect or pay
any sales tax at all for USA customers, which was a really nice bonus.
This law was set in 1992 after a different Supreme Court case, Quill Corp versus North
Dakota.
It was ruled that nexus was required to collect and pay sales tax, but that law was recently
abolished by the new Supreme Court ruling on June 21st.
Here's what happened.
In 2016, South Dakota passed a Kill Quill bill.
In it, required out of state vendors regardless of nexus to collect and pay sales tax if they
were making over $100,000 a year in sales or doing more than 200 transactions in the
state of South Dakota.
Well, the online furniture retailer Wayfair was not happy with this new law and they took
South Dakota to court over it and of course they lost.
In a five to four decision, the Supreme Court ruled that the previous 1992 ruling was out
of date with the current age of the Internet and said that South Dakota was allowed to
pass their bill.
Question three: does this now mean that I have to collect and pay sales tax within all
the states in the USA?
No, no, no.
It doesn't.
The South Dakota versus Wayfair ruling sets two very important precedents.
Firstly, yes, it does set the precedent that states are now allowed to pass your own bill
that will require out of state vendors to have to collect and pay sales tax.
However, it is important to note that until states have passed legislature, the old rule
still applies and most states have yet to actually do this.
So yes, that is one precedent.
But it sets another.
The South Dakota versus Wayfair ruling was affirmed by the Supreme Court, but that bill
was aimed only at large online retailers.
Again, to be eligible under this new law, you've either have to be doing over 100,000
dollars a year in sales and South Dakota, or be doing over 200 transactions.
When other states passed their own laws, they will need to be aimed at large online retailers
as well to meet this precedent.
If they want to expand that to include everyone, a new court case will be required.
So here's the thing.
If you are new to dropshipping then you are not required to collect and pay sales tax
within any state that you don't have nexus in, so don't worry about it.
Once you get to the stage of this law impacting you, you will be making more than enough money
to hire an accountant to manage all of this for you, and the chances are even after all
the states have passed their own version of this bill, you're probably only going to be
collecting and paying sales tax to a small percentage of the states anyway.
Most likely, the larger ones like New York.
So let's calm down and figure out how most of you should be collecting sales tax by asking
yourself one important question.
Question: do I have nexus in any state in the USA?
For most people, the only way that they're gonna have nexus in a state as if they live
in it or if they own property in it.
There are some more obscure ways that you can have it, so if you suspect that you might
be under these clauses, you should be sure to to seek an accountant.
And if you live outside the United States and you don't have nexus in any state, then
simply don't worry about it.
Until you start making lots of money, this isn't going to impact you and you can probably
go away and leave this video right now.
But if you do have nexus in a state, then you are obligated to be collecting and paying
sales tax within it.
Luckily though Shopify makes this very simple.
All you've gotta do is sign into your dashboard and click settings.
On the settings page, click Texas.
Once the page loads, come and click on the United States.
Next you'll need to let Shopify know which states you have a physical presence in.
Type in the state and select it and give your zip code.
Shopify will only let you add in tax settings for countries that you have a shipping option
to.
This store only has a shipping option enabled to the USA, which is why that is the only
country that showed up in my list.
Once you've done that, come and click on products and open up each of your products.
I'm going to be opening up one of mine in the store, the camera lens travel mug and
show you how to enable taxes on it.
So all you've got to do is scroll down to the pricing box and took the check box there
and once you've done that, click save.
If you're eligible for sales tax, I recommend that you go and you tick it each time that
you add a new product.
Shopify will automatically collect the right amount of sales tax for the order, which is
very handy because in some states, the amount of tax that you need to pay will change depending
upon what city your customer lives in.
For example, this is very relevant in the state of New York.
I went in and did a $10 test purchase in my store and I put in my address for the first
purchase to be from New York City and the second one to be from Buffalo.
Despite both being located in the state of New York, the taxes charge for each were different
since not only does the state of New York charge a 4% tax on both sales, but each of
these cities has their own individual taxes to collect and pay as well.
So the taxes for New York City are slightly higher than for Buffalo, but because Shopify
automatically calculates this for you, you don't need to worry about it.
So, hopefully meeting your tax obligation seems a little bit less scary.
If you liked this video and you found it helpful and you'd like even more videos about creating
a real dropshipping business, then be sure to subscribe to Wholesale TED and click that
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It teaches you how to set up a dropshipping store from start to finish, and if you would
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And before you run off, I've got one last freebie I'd like to give you.
Here at Wholesale TED, we have a free ebook that teaches you the six steps that six figure
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To get that ebook for yourself, again, simply click on the link in the video description
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