Should I Charge Taxes for Dropshipping on Shopify?

Reading Time: 5 minutes

Dropshipping is a simple idea that can be very profitable, until you think about taxes and other legalities.

This comprehensive guide to dropshipping taxes will be of great help to you if you own a dropshipping business or plan to start one soon.

Dropshipping: The Business Model

Dropshipping has enjoyed immense popularity and success in recent years.

It is now easier than ever to open an online store with the top eCommerce platforms like Shopify, BigCommerce and Weebly – provided you have a business plan.

This is our own Service Offered by the Blog Author.

shopify dropshipping store set up

Did you know that a successful business model can become a nightmare if it fails to meet the legal requirements?

Dropshipping is a business model that allows you to make two purchases for one product. The buyer buys a product from a vendor and the vendor from the seller. It’s confusing, right? Which sales tax is charged and when?

How much tax do you have to pay if you run a dropshipping store?

Dropshipping stores may be subject to two types of taxes: income tax and sales tax.

What is the Income Tax?

Income tax is the tax you pay on your store’s annual income. This is the same tax you pay on your wages if you work a regular job.

Your profit determines how much tax you must pay. If you do not have a profit, this tax is not applicable to you. If you have suffered a loss in the past year, you may be eligible for a tax credit.

Your local government will collect income tax. If you are a resident of the US, for example, you will always be subject to income tax. You will still have to pay income tax even if you are serving customers in another country.

If you are based in the US, you might have to pay taxes to both the federal and local governments. Income tax is not as difficult to manage than a sales tax and is relatively easy to pay.

What is the Sales Tax?

Sales tax can be described as a form of consumption tax. It is charged on purchases of goods and services.

End-users are the actual buyers of the products and services so they have to pay the tax.

Dropshipping is a slightly different business model than traditional retail. It can be difficult for your online shop to determine the buyer or consumer of the product.

Dropshipping is a concern because the end-user pays the sales tax. Do you, the vendor, or the retailer collect the sales tax?

This question is not easy to answer. You are generally not subject to sales tax for purchases made for resale. However, for this exemption certificate to be granted, you will need to apply.

What are Exemption Certificates?

Also known as resale certificates, exemption certificates can also be called resale certificate. Each state has its own rules for issuing this certificate to retailers. While some states recognize certificates issued by the state they are not required to accept multi-state certificates. This is a certificate that can be accepted by many states, 38 in total.

Your resale certificate in all member states will also be recognized if you are registered under the Streamlined Sales and Use Tax Agreement.

Before you can start your dropshipping business, there are some important points you should know about exemption certificates.

This is our own Service Offered by the Blog Author.

shopify dropshipping store set up

Exemption certificates can only be used if you purchase products with the intention to resell

Exemption certificates can only be used if you buy stuff from a supplier solely for the purpose of selling it to others. It is important to note that every state has its own laws regarding the issuance and usage of resale certificate .

Exemption certificates may not be accepted by all suppliers

Your supplier has the right to refuse or accept your exemption certificate. If the retailer submits a fake resale certificate, the supplier will be the next to pay the sales tax.

Are you required to collect sales tax from your customers?


If you are registered through SSUTA and have sales tax nexus within a state, you will need to collect and remit the sales tax in that state.

Dropshipping stores may have to be aware of the sales tax exemption and sales tax laws in your state.

However, if there is no nexus between you and the state, it generally means that you are exempted from paying sales tax.

You might also be liable for tax if the vendor is located in the same state of the final consumer.

Some states consider in-state vendors to be a nexus for the sale. However, there are a few states that have specific legal provisions.

To ensure compliance with legal clauses, make sure to check the policy of each state.


You are more likely to collect or remit goods-and-service tax (also known as GST) if you are based in Canada. This tax is assessed on every phase of production.

GST is a flat-rate percentage, similar to the US sales tax.

Canada follows the “place of supply law” currently. This rule determines what tax rate you should use to collect taxes and pay the relevant authority.

It is important to remember that the factors that determine the supply location of your products and services depend on where you are located, what type of products or services they offer, and who you sell them to.

If you are an online shop selling tangible products, there is no confusion. If you are operating from Canada, simply charge GST everywhere. To learn more, visit the Canada tax guide.


Next on our wish list is the owner who sells from the EU.

If your EU-based VAT-certified business is also located in the EU then reverse-charge will be applied to B2B transactions.

You don’t need to pay VAT if your business is located outside of the EU.

If you are located outside of the EU, dropshipping businesses must be registered for EU VAT. Once you reach the thresholds, you can start taxing immediately.

It is crucial to charge tax at the time your customers make purchases. Dropshipping stores that are not VAT registered run the risk to provide poor customer service.

Customers who order products from outside the EU might be subject to additional charges and VAT. These unexpected charges can lead to a negative customer experience.

If you want to offer the best customer service possible to your customers, we recommend that you comply with the EU distance selling laws.

Shopify automatically collects dropshipping taxes on every order. To see how dropshipping tax works on other platforms, you might need to look at guides.

Keep in mind that the guides on each platform highlight the sales tax collection process on the respective platforms. They are not obliged to provide legal advice.

A Shopify guide states that the following reference guide is intended for informational purposes only. It is not meant to replace professional tax advice. You can contact the US tax authorities or a professional tax advisor if you have any questions about tax legislation. ( Source).

This is our own Service Offered by the Blog Author.

shopify dropshipping store set up

Here are some things to consider before you start and run your dropshipping store

You must first and foremost register your business. This is a critical step. We recommend that you consult an attorney or tax specialist for advice on dropshipping tax laws in your area. Next, you might want to apply for an EIN number. The IRS uses the employee identification number to identify your company. It is very similar to the social security number.
Last but not least, get in touch with your local government to determine if you require a local business license for your dropshipping shop to operate online

The Key Takeaways

You are required to pay taxes on your annual income, just like your regular 9-5 job. This amount must be paid to your local government each year.

Dropshipping shop owners must also collect and pay the sales tax to local governments. You are not responsible for VAT or sales tax if your supplier is out of state.

Average rating 4.9 / 5. Vote count: 756

No votes so far! Be the first to rate this post.