Dropshipping taxes: who collects sales tax and who pays income tax

What are the two sales in dropshipping?

When a customer orders from your store, two sales happen: you sell to the customer at retail, and your supplier sells to you at wholesale, then ships directly to the customer. Sales tax looks at each sale separately.

Where do you collect sales tax?

In states where you have nexus through your own presence, such as your office or staff, or through sales above the state's economic threshold. Your supplier's warehouse does not usually give you nexus, because the inventory is the supplier's, not yours. If you sell through a marketplace such as Amazon, eBay or Etsy, the marketplace collects on those orders. On your own store, you do. See economic nexus and Shopify sales tax setup.

How do you avoid paying tax to your supplier?

Give the supplier a resale certificate. Without one, a supplier with nexus in the customer's state may have to charge you sales tax on the wholesale price. The difficulty is that some states only accept resale certificates from sellers registered in that state, so a dropshipper not registered in the customer's state can end up paying tax to the supplier. Rules vary. The Multistate Tax Commission's uniform certificate and the Streamlined Sales Tax certificate are accepted in many, but not all, states. See resale certificates.

How is dropshipping income taxed?

You pay income tax on profit, not sales. Profit is gross sales, less refunds, less what you paid suppliers for the goods sold, less platform, payment and advertising fees and other expenses. As a sole proprietor or single-member LLC, it goes on Schedule C, with self-employment tax on the profit. You hold no inventory, so cost of goods sold is simply the supplier cost of items sold. See Schedule C.

Measuring real margin per order is covered in dropshipping profit tracking. Print on demand works similarly; see print on demand taxes.

What records should you keep?

• Store and marketplace sales reports by state.
• Supplier invoices matched to customer orders.
• Resale certificates given to each supplier, and any tax suppliers charged you.
• Advertising and platform fee statements.

Reconciling supplier invoices to sales is the most important habit, because it proves cost of goods and catches supplier errors. See bookkeeping basics.

What about dropshippers outside the US?

A non-US owner running a US store through a US LLC may have no US income tax to pay if all the work is done abroad and there is no US trade or business. Sales tax obligations, though, depend on sales into each state, not on where the owner lives. See what counts as a US trade or business.

What are the common mistakes?

• Assuming the supplier handles all sales tax.
• Paying tax to suppliers without trying to give a resale certificate.
• Not tracking sales by state against economic thresholds.
• Reporting net payouts instead of gross sales and expenses.

This guide is general information. It is not tax or legal advice for your situation.