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Tax Obligations 101 for Dropshippers

published on 29 April 2021

Started a new dropshipping business recently? Or in the process of opening one? Then you must be oh so excited to make it big in this business and start living your dream lifestyle. Right? But hold your horses. Have you researched how to start your business legally? One of the stupidest mistakes that eager rookies make is to jump right into it without any proper research, and then they end up losing more than they bargained for in penalties due to unpaid taxes or businesses that haven’t been licensed. For example, do you know what are the taxes to be paid, or for that matter, how to download AliExpress order details for your bookkeeping? Read on to gain detailed information about this stuff.

1. Licensing your Business:

One of the initial things that you need to do as a business owner is to license it with the correct business license to ensure you protect your personal property by identifying them as separate legal entities. For a drop shipper who is just starting out, the LLC (Limited Liability Company) will be the best suitable one. Sole Proprietorship will offer you no personal liability protection, whereas C Corporation will be too expensive to incorporate and it will be subject to double taxation as well.

2. Taxes That You Need to Pay as a Dropshipper:

Now comes the part about paying your taxes. You can never expect to skirt around this. If you are expecting to make money from dropshipping, then you should be prepared to pay your taxes as well, or soon the feds are gonna come knocking on your door.

“Paying your taxes on time is very important to ensure you do not lose your business, and for that, keeping tabs of your sales through invoices is vital.”

You don’t have to tell me how much you hate to file your taxes, most of us do. If you are working a job, then you might take your taxes for granted. But if you own a business, then all things related to taxes are completely your responsibility. But worry not, meeting your tax obligations while being a dropshipper is quite easy.

If your suppliers are US-based, and you live in the US as well, then there is still a lot you need to know about your taxes. You need to pay your federal taxes as well your state taxes which will include taxes of each city or district. But if you are living in a different country, and only your customers are based in the US or any other country for that matter, then you only need to pay taxes to your residing country.

But, if your supplier is AliExpress, that means your supplier is Chinese, then this process gets further simplified.

    2.1 Income Tax in Dropshipping:

Whether you are an employee at an organization or you own a business, everyone has to pay Income Taxes. But remember, you have to pay taxes on the profit your store makes a year, not on the total revenue. Do not make the mistake I made. Start saving the percentage of tax you need to pay according to your country for each month separately. I was too busy being excited about owning a business and ended up having to pay penalties as I was late in paying my taxes.

Now, AliExpress does not provide any invoices for you to keep track of your accounts or to provide them to the officials during the tax filing season. What you can do is use some external tools like AliBilling to download AliExpress Order Details and then use them for your bookkeeping.

    2.2 Sales Tax in Dropshipping:

Coming to sales tax, it is when a governing body imposes a tax on goods or services sold within their jurisdiction. If you are staying outside the US but your customers are from the US, then you do not have to pay it. Isn’t that great? This is because the law requires you to have a nexus in a state before you have to pay sales tax in that state. Nexus is the legal term for when you have a physical presence that is significant enough in a US state that you are required to collect and pay sales tax. This means if you have a residency in that area, or you have a warehouse or office. So even if you lived in say, New York, and your customer was from Washington, but you did not have any nexus in Washington, then you do not have to pay any sales tax to the state of Washington.

In the US, each state manages its own tax rates, and thus the federal government has no hand in it. But each state has different tax rates. While some states such as Louisiana have sales tax rates as high as 10.02%, other states like Oregon and New Hampshire and have none! Literal tax-havens.

But a recent supreme court ruling means now you are required to collect and pay sales tax if you are a large out-of-state vendor (the current baseline is doing $100,000+ sales in a single state, or 200+ transactions in a year) – regardless of whether you have nexus in a state or not. However, If you are a new drop shipper, then you do not have to worry about this until you start making significant profits.

For now, paying your sales tax for the state you do have nexus is enough. But then again comes the headache of counting the sales tax and actually knowing what the rate is for your state. For this too, you can simply integrate TaxJar in your WooCommerce or Shopify store. This will then automatically collect the right amount of tax in an order according to the state.

As states become more aggressive and thorough on audits, small business owners are the first ones to feel the sting when they find out that you have neither licensed your business nor are you paying taxes for it. Big corporations have the means to crawl their way out of almost all legal situations, but what about you? This is the reason why you need to license your business under the correct licenses so that you do not end up losing everything and the government taking everything away from you, all because you forgot to do the bare minimum while starting a business. Remember about the different taxes that you need to pay, and start saving for it right from the start as well. Take care of all these legalities before you start and launch your business to stay away from Big Brother’s claws.