Dropshipping Taxes and Payments – Must-Know Facts


Want to learn more about dropshipping and taxes? Then this article is for you.

Traditionally, every brick-and-mortar store is expected to pay taxes. Paying taxes is required for all businesses, including those operated online. This means that just because you have a dropshipping business doesn’t mean that you are exempted from paying dropshipping taxes.

To stay in good legal standing, your dropshipping business must meet its tax obligations. In fact, the location and the legal structure of your business will affect the types of dropshipping taxes you have to pay.   

But this imposes the question: “What kind of taxes do I need to pay for dropshipping?”. So, we will try to provide an answer to this question in the next paragraph.

Dropshipping and taxes: What kind of taxes do you need to pay for dropshipping?

In general, there are two types of taxes for dropshipping businesses. And they are as follows:

1. Income Tax

Let’s start with the basics of income tax. Well, income tax is a kind of tax that a government imposes on the income that businesses and individuals generate.

Moreover, as a dropshipping store owner, the amount of income tax you have to pay depends on your profit and the location of your business.

When running a dropshipping business, you need to pay income tax to your local government. This means that if your business is based in the United States, you will have to pay income tax to the US government. And even if your customers are based in, let’s say, France, you will have to pay income tax to the US government.

Luckily, this type of tax is easy to handle. It is not that complex compared to the sales tax.

2. Sales Tax

In essence, sales tax is a kind of consumption tax. Sales tax (in the U.S.), VAT (in the EU), and GST (in Canada) are forms of consumption tax.

Furthermore, governments impose this type of tax on the sale of products. And perhaps the most important thing you need to know about dropshipping and sales tax is that the end consumer (your customer) has to pay it since they “consume” the end product.  

Vendors (in this case, dropshippers) serve as agents that collect the tax on the state’s behalf. As the sales tax is mainly the end consumer’s responsibility, vendors do not absorb the tax. They have to separately state the tax on the invoices or receipts they give to their buyers.

You are a dropshipper, aren’t you? So, you are probably confused and have no idea who has to collect the sales tax from the end customer. Are you, as a dropshipper, responsible for that? Or, is it the dropshipping supplier’s job to deal with it?

In most cases, you are not obliged to pay sales tax on products you buy from a dropshipping supplier for resale purposes. There is logic in this because you, as a dropshipper, are not the end consumer. You are actually a reseller that resells the products you buy from your supplier to the end consumer.

Dropshipping and taxes in different countries and regions

Whether your business operations are based in your home country or somewhere else, we have probably got you covered. Here, we will focus on the dropshipping taxes, particularly the sales tax, in the United States, Canada, and the EU.

• Dropshipping taxes in the U.S.

You, as a new or an already established dropshipper in the U.S., must understand your dropshipping business’ pathway to meeting the legal requirements and complying with the tax obligations in the country.

Do you need to pay sales tax to your dropshipping suppliers?

As mentioned above, you may not have to pay sales tax on what you buy from your dropshipping suppliers because you are a reseller.

And there is a sales tax exemption for products bought for resale in the United States. However, you must apply for an official exemption certificate to take advantage of the exemption.

In the United States, the rules for exemption certificates vary from state to state. That’s why it is advisable to consult a tax professional before applying for this certificate.

Also Read: What is Tax Form 8821?

Do you need to charge your customers sales tax?

Remember that in this country, all vendors (whether dropshipping suppliers or dropshippers) are responsible for collecting and remitting sales tax if they have sales tax nexus in the state to which the order ships.

We know that the topic of dropshipping and taxes is quite complex and inundating, and, therefore, we will give an example.

Let’s suppose you run a dropshipping store for electronics from Massachusetts, meaning you have “nexus” in Massachusetts. Thus, you have to collect sales tax from Massachusetts customers and remit the taxes collected back to the state.

However, if you sell, let’s say, a smartphone to a customer in California, you are not obliged to charge that customer sales tax since you do not have sales tax nexus in California.

And if your dropshipping supplier has nexus in the state, but you do not, they may be required to collect sales tax.

Since this is a complex issue, it is recommended to consult a tax professional and check the tax policy of each US state to ensure you are staying within the rules.

Check out our previous article about how to start a successful dropshipping business in the United States.

• Dropshipping taxes in the EU

Whether you are a dropshipper selling products to EU customers or an aspiring dropshipping entrepreneur looking to target the EU market, you have probably heard about VAT so far.

VAT stands for Value-Added Tax. As stated above, it is a kind of consumption tax similar to the sales tax in the United States.

Do you need to pay VAT to your dropshipping suppliers?

In case your dropshipping business is VAT-registered in the European Union, and you are sourcing your products from an EU supplier, the reverse-charge mechanism will manage VAT on your purchase.

But in case your dropshipping business is based outside of the European Union and you are sourcing your products from an EU supplier, you will not have to pay VAT.

Do you need to charge your customers VAT?

Well, it depends on whether your dropshipping business is based in the European Union or not.

On the one hand, you have to charge VAT on each sale you make in the EU if your business is based in the EU. On the other hand, you have to register for EU VAT and charge your customers VAT once you surpass the “distance selling thresholds” if your business is not based in the EU.

Check out our guides on how to start a dropshipping business in Estonia, Italy, and Spain. Here, you can find the legal and tax guide on how to operate an online business in Estonia.

• Dropshipping taxes in Canada

In Canada, the sales tax is known as GST or Goods and Services Tax. Let’s clarify this point before we dive into the details. GST is also a type of sales tax or consumption tax.

Do you need to pay GST to your dropshipping suppliers?

If you are a registered business in Canada with a valid GST/HST number, you will handle tax through Canada’s reverse-charge mechanism. Sure, you also need to consult a local tax accountant or other tax specialists to ensure your dropshipping business acts in compliance with the laws.

Do you need to charge your customers GST?

Your business has to charge GST or HST in Canada unless it qualifies as an exception. That’s why it is crucial to understand the exceptions and the requirements for charging, collecting, and remitting this kind of tax in the country.

For more information, you can check out this guide. Also, read our previous article about dropshipping in Canada.

How to set up your dropshipping taxes on Shopify

As you can see, as a dropshipping store owner, you may need to charge taxes on your sales, and then report and remit those taxes to the relevant tax authorities.

Tax laws and regulations are complex and change from time to time.

But Shopify is an e-commerce platform that automatically handles the most common sales tax calculations. Furthermore, the e-commerce platform uses many default sales tax rates and updates them on a regular basis.

You can learn how to set up your dropshipping taxes on Shopify here.

What are the best dropshipping payment processors?

First things first, dropshipping payment processors securely facilitate online money transactions between you and your customers.

For example, someone wants to buy an item from your online store. They add that item to their cart, fill in their address, and then provide their payment information. And this is where the dropshipping payment processors come into play.

In addition, here are some of the best and most commonly used dropshipping payment processors:

  1. Shopify Payments. This is one of the dropshipping payment processors completely integrated with the Shopify platform. Plus, it is simple to setup the Shopify Payments.
  2. PayPal. Many enterpreneurs usually use this dropshipping payment processor for their online stores. Additionally, PayPal is available in about 200 countries worldwide. And it is easy to set up PayPal on Shopify.
  3. Stripe. Stripe is another popular payment processor available in more than 40 countries. Fortunately, selling online has never been easier with Shopify and Stripe.
  4.  2Checkout. 2Checkout supports diverse currencies and languages to streamline payment processing for online merchants and buyers in about 80 countries. And it is easy to install this payment processor on your Shopify store.
  5. Apple Pay. It targets Apple users and is a popular payment processor for mobile wallet transactions. You can learn here how to enable your customers to pay for their orders using Apple Pay.


Paying dropshipping taxes is a necessary part of running a dropshipping business. To avoid unexpected costs and fines, you must acquaint yourself with the most common types of dropshipping taxes that you have to pay.

Again, do not forget to consult a tax professional because they will help you minimize your tax liabilities and advise you on important tax matters.

And to let your customers buy something from your dropshipping store and pay easily and securely, you must select some of the best dropshipping payment processors. It is advisable to use multiple payment methods to meet and satisfy the needs of more customers.

Want to learn more?

The following links have been curated specifically for businesses looking for further information about dropshipping fulfillment, apps, profit margins & product pricing, etc.

Dropshipping Fulfillment: Supply Chain and Fulfillment Process Explained;

Best Shopify Dropshipping Apps – 2021 Review & Expert Guide;

Dropshipping Profit Margin and Pricing: A Step-By-Step Guide 2021;

What Is the Minimum Budget to Start Dropshipping with Shopify?

Expert Advice For Everyone Starting Their First Dropshipping Store;

Dropshipping on Shopify vs. Amazon FBA [Expert Advice].

About the Author

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Martin Stoimenov
Co-founder at Dropshipping.com! Talks about Marketing, Business Structure, and Growth Hacking!