In this video you’ll learn how to pay sales tax when dropshipping, and how to easily collect sales tax for Amazon & Shopify.
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Please note: This advice should not be used in-place of a qualified accountant. Anyone running any business should seek the advice of an accountant.
Question: What taxes do I need to pay?
1) Income tax to your local governing body (if you live in Australia, you’d pay it to the Australian government, if you live in the USA you’d pay it within the USA etc).
2) Sales tax. In the USA, sales tax is collected by individual states, and NOT the federal government. You will usually pay a state tax + a local district tax + in some cases, a special tax.
In addition, some states are origin based (you pay the sales tax rate based on where the item is being shipped from) and some are destination based (you pay the rate based on where the customer is based). Destination based in tricker because the rate you collect/pay is always changing.
Question: Who has to pay sales tax when dropshipping - me, the dropshipper, or both?
First, determine whether you or your dropshipper has nexus in a state. Nexus is a legal term which means that your business has a sufficient physical presence in a state that means you need to collect and pay sales tax within it. Based on this, you’ll fit into one of 5 scenarios:
1) Your customer is based in Oregon, Delaware, New Hampshire or Montana
Congratulations! These states don’t have sales tax so neither you nor your dropshipper have any obligations to collect/pay sales tax for these customers.
2) Neither you nor your dropshipper have nexus in your customer’s state
Neither you nor your dropshipper need to collect/pay sales tax on these orders.
3) Your dropshipper has nexus in your customer’s state, but you don’t.
Some states will require that they collect sales tax. But, if you provide them with a resale certificate/license, this sales tax can usually be waived.
4) You have nexus in your customer’s state, but your dropshipper does not.
You need to collect/pay sales tax on the orders, not your dropshipper.
5) Both you and your dropshipper have nexus in your customer’s state
You’ll need to provide your dropshipper with a resale certificate/license. It means they can waive the sales tax on the order between the two of you, and then you’ll be required to collect it from the customer.
Question: How do I get sales tax waived?
If you’re eligible to have sales tax waived you’ll need to get a resale certificate/license to prove that you’re buying the items for the purposes of resale. SaleHoo have a great guide with links to how you can apply for each state’s resale certificate online: http://wholesaleted.com/go/resale-certificate/
Question: What is an easy way to collect sales tax?
I recommend that you use a service called TaxJar. Get a free 30-day trial here: http://wholesaleted.com/go/taxjar
For Woocommerce, they have a free plugin which when connected sets up your sales tax settings for you.
For Amazon.com it connects to your account to easily create reports that makes submitting your returns easy. In addition, if you’re selling on Amazon I recommend setting up their Amazon Tax Service. Here is how you do it:
Step 1: Login to your seller account.
Step 2: Click on settings and click “Tax Settings.”
Step 3: Click “View/Edit your Tax Collection and Shipping & Handling.”
Step 4: Choose how to manage your Product Tax Codes. To make it easy, you can select “Use Default Product Tax Code.”
Step 5: Specify your Tax Collection Obligations. TaxJar have a free cheat sheet you can download which tells you which boxes to tick.
TaxJar also connects to your Shopify account to make reporting easy. And be sure to set up your sales tax settings under the “Tax” option. Under physical presence, type in the state you have nexus in. If you have a physical address tied to your nexus, type in the ZIP for it too, and save that entry. Do this for each state. Shopify will now automatically add sales tax to each purchase in the states you have nexus in.
Question: How do I pay the sales tax?
You will need to file a report with each state and outline how much money goes to each district, city etc. Because of all of the different district/special taxes this is a lot of paperwork. That is why I recommend you use TaxJar’s autofile feature, which will file and pay your sales tax returns for you in 37 states. Remember, you can get free trial here: http://wholesaleted.com/go/taxjar