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

IMPORTANT: Please watch our updated video on how to pay sales tax when dropshipping.
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DISCLAIMER: We are not CPAs, accountants or lawyers. This is NOT official legal advice!

In this updated video, Sarah discusses what your tax obligations are as a dropshipper after the Wayfair vs. South Dakota Supreme Court ruling. This video is relevant for the following types of sellers:

* They are sourcing items from Chinese dropshippers, such as Aliexpress dropshippers.
* They are selling to customers that are based in the USA.

Please note, on this channel we only focus on teaching new dropshippers how to focus on the USA market, which is why we will only discuss your tax obligations when selling to USA based customers.

***What Taxes Do I Need to Pay?***

When dropshipping you there are 2 types of taxes to pay:

1) Income tax
2) Sales tax

***Who Do I Pay Income Tax To?***

You pay income tax to your local government/governing body. So if you live in Australia, you will always pay your income tax to the Australian government. It doesn’t matter if your customers are based in the USA: you do not pay income tax to the USA government, you would pay it to the Australian government.

***Do I Need to Collect and Pay Sales Tax?***

In the USA, it is states that you need to collect and pay sales tax to - not the federal USA government. Previous to June 2018, there was a law in the USA that meant that you had to have nexus in a state before you were required to collect and pay sales tax in it. Nexus is a legal term that means you have a sufficiently large physical presence in a state to be eligible to collect and pay sales tax.

For example, if you lived in Arizona then that would be a very large physical presence, and so you would have nexus in it. If a customer comes to your dropshipping store and purchases a mug from you, you would be required to collect and pay sales tax on that order. The sales tax rate in Arizona in 5.6%. You could need to collect this tax on the order and pay it to the Arizona state.

Now let’s imagine that a customer from Texas came to your store. Because you didn’t live there (or have any physical presence in Texas), this means that you didn’t have nexus in Texas. That meant that you were not required to collect sales tax on that order and pay it to the Texas state.

This also meant that if you were not a USA citizen that you usually did not have nexus in any state, and thus didn’t have to collect/pay any sales tax at all.

However, in June 2018 a Supreme Court ruling (South Dakota vs. Wayfar) changed this. It abolished this law and said that states can now require large out-of-state vendors to have to collect and pay sales tax. So… does this mean that you now have to collect and pay it even if you don’t have nexus?

NO! It doesn’t. To be required to collect and pay it, the following needs to happen:

1) A state needs to pass a law which overrides the baseline nexus law (most states have not passed a bill yet).

2) You will need to be a large vendor (the current baseline is doing $100,000+ sales in a single state, or 200+ transactions in a year).

For most established stores, this means that they will likely only have to start collecting and paying sales tax in a small percentage of states - likely the large ones such as New York City.

BUT, if you are a new dropshipper then you do not need to worry about this until you start making a lot of money and making a lot of sales. For now, you only need to collect and pay sales tax on orders made in states that you have nexus in (which for most people, will only apply to the state that they live in). For states to legally pass a bill that targets small vendors, a new Supreme Court case will be required.

Want to find out how to start collecting sales tax on your orders in Shopify? Watch the video to see Sarah’s step-by-step tutorial on how to pay sales tax with Shopify!