April 7, 2020
MAJOR UPDATE: How to Pay Tax When Dropshipping (How to Pay Sales Tax with Shopify)

MAJOR UPDATE: How to Pay Tax When Dropshipping (How to Pay Sales Tax with Shopify)


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 little notification bell next to it so that
you don’t miss out on any of our videos. And let you know that we here at Wholesale
TED have a premium, over the shoulder training program called the Drop Ship Club. It teaches you how to set up a dropshipping
store from start to finish, and if you would like to join that, simply click on the link
in the video description below. 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 dropshipping stores follow to make over $10,000
every month. To get that ebook for yourself, again, simply
click on the link in the video description below.

100 thoughts on “MAJOR UPDATE: How to Pay Tax When Dropshipping (How to Pay Sales Tax with Shopify)

  1. Hi! I use PhysicalAddress to have a virtual address in the US so I could put it in my store. Does anyone know how sales tax work that way, will I still pay taxes to my country or shall I pay taxes to the US?

  2. To clarify, being told not to add the tax option on shopify by other youtubers. If i do or not, am i still paying something when i file taxes for it? Does adding the tax on my product automatically save me from paying them when i file?

  3. extremely helpful! tks! What if I decide to include other destinations? (countries) in order to ship to south america for example?

  4. Your videos are always full of value bombs and well organized and researched. You put everything simply for us all and have great visuals. And you don't even live in the states…unreal!! I totally value your channel, Sarah! Much appreciate…TY!

  5. Thanks to South Dakota vs Wayfair, more and more states with "Economic Nexus" allowing them to tax remote transactions. A small few states have Cookie/software Nexus. As of January 1st 2019, there are about 29 states with what is called "Affiliate or Click Through Nexus". If you are a US citizen drop shipping to people in these states, you will still be required to register in all 29 of these states. You can file with them individually or use some company like Avalara to help you file all the correct forms. I also recommend some sort of tax calculation plugin to help automate your calculations for each area. A good CPA can help you with all of this.

  6. how do you pay tax on shipping? cuz you could have a flat rate on your site but the shipping price on ali express could differ from country to country. do you pay it on the profit? do you pay any at all?

  7. Great content as usual, Sarah! But what about this: https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-source-of-income

  8. guys if you do amazon fba, you probably have nexus in 10+ states so you gotto pay sales tax (legally)… people pay it? i donno… will they be paying it in future? 100%

  9. I am still lost. I am in Canada and I want to sell only to the US so I didn't have to worry about sales tax at all. Based on what you said, it seems I will eventually have to worry about it regardless.

  10. Thanks for the vid…gonna sell some merch with music downloads and using a drop shipper…watched five videos from tax accountants and got nothing out of them but a killer headache…you were the only one who could explain this in a fashion that made sense…much appreciated πŸ™‚

  11. Hey Sara, maybe I missed something, but does the tax app take the money out for you, or does it just do the calculation?

  12. I have an us bank account and tjey wire to me so…. Where are the taxes here were i live u dont declare anything…

  13. Sarah, first of all…thanks for all your information, I have a simple question ( for you ), I am a no US citizen…to collect my pays I need a US bank account, to have a bank account I need to be a US citizen or have a company in the US, I decided to create an LLC in Wyoming…then, this LLC will be a physical presence on the US..then I need to pay income taxes AND sales taxes…is that correct?

    by the way…I don't have a problem with that, indeed maybe I'm crazy but I think Taxes is a fair contribution to societies, for the people who love to be a lone wolf and no to pay taxes…is their choice, please don't shoot to me.

    is that correct Sarah? or I'm wrong?

  14. Really confusing tho. I live in Europe and would also like to start with dropshipping.

    Generally importing in my country is this:
    Buy product with INVOICE
    Pay import taxes and VAT (21%) on buy in price

    Sell product and pay taxes (21%) on the price of the product (salestax)
    VAT on importing is regained (deductible)
    Pay taxes on income (profit)

    But with dropshipping, I would never pay import taxes: problem 1
    I would not be able to pay sales tax in my country (21% on product price) when shipping a product to another without entering mine, therefor I question if it's legal: problem 2
    I can't even bring in my costs at VAT registration because I have no INVOICES: problem 3
    If problem 2 is solved by paying taxes in the destination country, it would be a huge hustle to do that, and very costly since the accountant will spend hours to bring everything in (accountant costs 80euros/h excl vat!): problem 4

    Does anyone know how to overcome this? I feel like bypassing every rule and evading taxes. Not that I would not like to but I find it important since I don't want to pay huge fines or go to jail lol…

  15. What does this mean if your dropshipper, like Printful, is in California and I live in Illinois? I'm assuming that I have to pay sales tax for California too.

  16. thank god that there is finally someone who is talking clearly about paying or not to need to pay sales tax with shopify here ! thanks a lot!

  17. This is great information. I was worried id have to charge 20% vat because I live in the UK, that was pushing the product price a bit too high for my liking. Glad it's based on sale location instead. Thank you for the information

  18. What happens if some of the products didn't have a charge tax option? Best to keep the item or take the item off of the store?

  19. Sarah, once again, thank you for simplifying that. I was actually reading the HELP section in Shopify and got a little bit lost. You decoded it nicely, so thank you! BTW, I think that the US collects enough taxes! So my opinion on the ruling was NAY! Thank you again! πŸ™‚

  20. 200 transactions threshold is too little and can be easily reached by any small seller. In my opinion this an outrageous law implanted by the states and I’m ready to be part of the opposition. The states could have created something like TaxJar to make it easy for sellers but instead they want you to spend on accounting to collect and remit their money. F#€!ng outrageous.

  21. I live in the USA .. but I have no property or permanent residence in any of the 50 states. Do I have Nexus?

  22. Don't you get it? The giant corporations want to make it impossible for small businesses to even exist. Collecting sales tax for 50 different state sales taxes. impossible. They want to destroy the middle class. And they are. See you in tent city. πŸ™

  23. So Shopify collects the taxes for your nexus state, does it then send the tax money to where it needs to go? Or is that a required action by the business owner during tax time?

  24. I opened my company in Hong Kong, I never needed to pay sales tax, now I want to change my fiscal residence for the Panama, and I will not have to pay any taxes again, remember tax and theft.

  25. There are two types of nexus in the US. Physical nexus and economical nexus. It seems you've only covered (pretty much) physical nexus. With CA's upcoming tax law changes, how would you advise non-resident dropshippers to proceed? I've been looking at using TaxJar for dealing with sales tax. Have you used them?

  26. Yes very helpful!! I sell primarily on amazon… I’m not at all concerned about the federal government nearly as much as I’m concerned about amazons TOS

  27. I remember seeing your other tax video, where you mention the word Nexus at least 4000 times and I got a headache. This one is so much better. I finally understood!

  28. Only 200 sales in a state?
    I make that in a month with cheap digital items but I am nowhere near $100k
    They are still out of touch with the internet.

  29. Hi Sarah, thank you and the entire Wholesale Ted for all your videos, they are very helpful. I still have one question though, it's about that "OR" in $100.000 OR 200 transactions. While (unfortunately) I do not need to worry about $100.000 part, the 200 part might be important.
    Let's imagine I am an international dropshipper who found his niche and a winning product and has a whopping success by selling swimming suits to Alaska. My swimming suits are so great that every Alaskan wants to have them, so I am selling hundreds of them (hundreds of orders, i.e. hundreds of transactions, $5 per suit, made more than $15.000 within a year in Alaska alone). Do I need to collect Sales Tax?

  30. Does having a US supplier affects a dropshipping store on having to pay sale taxes? In other words is it considered having a physical presence? Also, can your residential location affect in any way the sale taxes you have to pay?

  31. One thing that I learned at a Tax conference was that if you live in Texas for example and you have merchendise at an Amazon location in let say California then you also have nexus in California. Their were a lot of people in my industry that were getting bit with back taxes because they assumed that because they didn't live there it was ok not to pay. Like Sarah said do your own research and make sure you know the laws. This of course only applies if you live in the States.

  32. I live in Australia. I use Aliexpress for dropshipping. My customers are from all other countries except Australia. Do I need to pay any sales tax? When should I start paying income tax?

  33. Launched my store a few days ago and attempting to follow most of your advice.. still waiting on that first sale, wish me luck!

  34. Hi Sarah, by any chance do you think you could do a video on taxes from a different angle: as a non-US resident but with an LLC and operating from somewhere else in the world?
    Unfortunately, I have found that the best solution for me living in an unsupported Paypal (can only send money) and Stripe country, I should register a business and get an LLC in the United States (state of Wyoming seems to be the best choice) then go on to get a Payoneer account and then link it to Stripe to finally be able to receive online payment. From this point of view, what taxes am I required to pay? I know I am not the only one in this case and that would help so much. I have done my own research but I am still confused. And it seems that it would require me to hire an accountant and overall, all this could be really expensive.

  35. I am handling Shopify store from India and I have set store address as ( POD provider address ) USA, I have no physical presence, in tax section it's shows collecting tax in USA, that's it? Shopify handle it? or do I have to manually pay tax somewhere?

  36. If you are a dropshipper and the supplier ships out the products do you have to pay sales tax. I heard if the retailer doesn't ship out products from their own warehouse they are not liable for paying sales tax.

  37. When you said at around 9:30 in the video that the only way you will have nexus in a state is if you own property or live in the state, this is not accurate. You establish nexus by meeting the threshold that each state has decided establishes nexus. In South Dakota, the threshold is $100,000 in annual sales or 200 transactions. In Oklahoma, it is a much lower threshold at $10,000 in annual sales. The whole point of this Supreme court case was to get rid of the previous "physical presense" rule previously defined in the Quill v North Dakota decision.

  38. Hi, another great video. May I know if I am not a US citizen and I do not live in the USA but I have an LLC in the USA, do I have to pay taxes..Uh, I have no Nexus in any state, too.

    Thank you

  39. Hi Sara…could you please have. look at he video in below..it is related to sales Taxes; just released Today.

    https://youtu.be/IF7rqRSsgE0

  40. Hey Sarah, for example if I am selling to Germany where sales tax is 19%, do I have to pay this sales tax if I have an LLC and not live in the USA?

  41. THANK YOU FOR THIS. YOU ARE AMAZING and keep it down to earth and easily applicable information to individuals. keep doing you!!!!!!

  42. Hi Sarah. Thank you for the video. I'm new to drop shipping and a lot of the products i have in my store are from Ali express. i have just read a review on a product on Ali Express where the buyer has complained about having to pay tax on a product he brought when it reached him. i have also seen a lot of descriptions saying that the buyer is liable for paying any tax on the product. so if the customer buys it from me and i buy it from the supplier how do i sort out the tax so my customer does not get a bill. (I live in the UK) or have I misunderstood how this works.

  43. i understand the fact that Shopify calculates the tax amount for you, but i did not hear anything about how is it paid, by who, and when. If anyone knows, thank you for answering me.

  44. If you have products stored in a state than you have Nexus and must collect and pay sales tax. If you have an Amazon store and Amazon is storing you merch than you have Nexus in every state that you merchandise is warehoused. That could be a lot of states. In some states like California the sales tax is different in different cities. If you live in California and your warehouse is in a different city, use the city that you live in. If this is wrong let me know.

  45. Then what happens if the company we are ordering from charges us a state sales tax? I created some things on Shapeways, and they charge me tax on top of the purchase that I'm ordering on behalf of somebody else (who bought the item via etsy.com)… and etsy isn't forwarding any of that fee to me, to cover the tax.

  46. Do you have any videos that go over the behind the scenes of dropshipping? What I'm referring to is setting up a business back account and LLC or business insurance etc.

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