Dropshippers are required to pay sales taxes to the country where their products are shipped and sold.
Now, lets discuss USA taxes; imagine being an e-commerce merchant, you put in the sweat and work and finally you are successful, earning a regular revenue and boom!
Your e-commerce platform just shuts down your account and to add salt to injury, you have a law suite on your inbox, your world comes crashing!
Well if this makes you scared, this really doesn’t have to be your story and you can prevent that from ever happening if you have the right knowledge!
It’s that knowledge that I am about to share with you. This is going to be an insightful read so make sure you read to the end!
Everyone doing business and earning money in the USA have the responsibility to pay taxes according to the applicable laws.
Now it doesn’t matter if you are one thousand meters away from the USA, in Canada, Africa, Asia or the Middle East.
If you are making money from the USA market online or offline! If you are importing into or shipping within the United states, then you very well have the responsibility to pay taxes.
I will be sharing with you the types of USA taxes for USA residents and non-residents doing business in the USA.
I will also share with you the exceptions so you can know if you are exempted from paying any of these taxes.
Finally I will share with you a pro tip;
I am going to share with you how you can legitimately dropship in the US and be exempted from paying sales tax.
Hmm.. okey I feel generous with information today! So, I am going to be giving you one solid information that you will hardly find anyone give you on the internet for free;
That’s how you can do e-commerce business in multiple countries, USA and Canada in this case and legitimately, please note the word “legitimately”.. and legitimately be exempted from paying some taxes in both countries (USA and Canada).
Finally I will let you know how to automate any tax fillings, applicable to your online business.
Automating your US taxes ensures you don’t worry about meeting your tax filing deadlines and helps you focus on your ecommerce business while letting all that tax filling work be handled accurately and automatically for you!
This is helpful especially if your a non-US resident and don’t have the thousands of dollars to spend in hiring tax regulatory agencies or a corporate lawyer.
Now, that’s a bunch of free solid information so let’s dive right into it guys.
What are the taxes applicable to ecommerce/dropshipping businesses selling in the US?
1. Income Tax: This tax is paid annually to the IRS and is usually about 21% of your annual business profit.
Exemption to income tax: Non US residents doing business as an individual and corporations registered outside the USA may be fully exempted from paying income tax or may qualify for a reduced income tax rate.
This depends on any enforceable treaty between your home country and the United state.
I recommend that you do your research as regards any treaties between your home country and the USA which may exempt you from paying income tax or qualify you for a reduced rate. Meanwhile, the USA has tax treaties with many countries.
2. Sales tax: this tax is charged on goods sold. Sales tax laws are regulated by states and not at the federal level.
This means that the sales tax chargeable varies and depends on the US state where your ecommerce or dropshipping business operates.
For example; The sales tax percentage in California is different from the sales tax percentage in Maryland and so on!
Exemption to sales tax; This five (5) states in the USA have $0 dollar sales tax rate; Alaska, Delaware, Montana, New Hampshire and Oregon.
As an entrepreneur, how do you know which USA state’s sales tax law is applicable to you?
This is determined by (a) Economic Nexus (b) Sales Nexus. Let’s quickly explain these two concepts;
Sales nexus; there is sales nexus to a state, if you have an employee, an office, an affiliate, a representative, a warehouse or a fulfillment center housing your products in that state.
For example; if your products is managed in the Shipbob fulfillment center in the state of California then you have a sales nexus in that California and therefore the state tax laws of California is applicable to you.
Basically for sales nexus is simply that you have a personnel or facility in a US state which makes that state tax laws becomes applicable to you.
So, if you have a sales nexus in 10 different USA state, the sales tax laws in those 10 states are applicable to you and you will have the obligation to remit sales tax to those 10 states!
Economic Nexus; This is capped on the amount of sales delivered to a US state. The threshold for economic nexus is basically determined by the state’s law.
For example; if you deliver products to customers in Maryland then you might become eligible to pay sales tax in Maryland based on an economic nexus i.e selling to customers in Maryland!
The law in Maryland is that you will be deemed to have met the economic Nexus threshold, If you earn up to $100,000/year in gross revenue, or make sales into Maryland in more than 200 separate transactions in the previous or current calendar year.
The amount of sales in a US state that amounts an economic nexus differs by each State’s tax laws.
However, note that not all state recognizes the concept of economic nexus or sales nexus in their local laws.
The states which have provisions for economic nexus usually puts the threshold between $100,000 to $200,000 sales per month.
These states; Alaska, Delaware, Montana, New Hampshire and Oregon, do not recognize the concept of sales and economic nexus in their local laws, therefor the sales tax rates for these states is $0.
So let’s run a quick summary of what you’ve just learnt about USA taxes. Okay?!
What are the two (2) Types of USA tax applicable to e-commerce merchants and online entrepreneurs making money from the USA Market?
1. Income tax
2. Sales tax.
What are the exceptions?
1. Income tax is not applicable to non-US residents or non-US registered businesses depending on any double tax exemption treaties between your home country and the US.
2. You get exempted from paying sales tax, if you do not have any sales or economic nexus with US states that imposes sales tax.
Having a nexus in ONLY zero sales tax states like Delaware will mean that you are not obligated to pay sales tax at the state level.
How do you determine which USA state tax laws is applicable to you ?
This is determined by the laws of the state where your business either has a sales nexus, economic nexus or both.
how can you do ecommerce business in the US and legitimately minimize your tax rates?
You are legitimately exempted from US sales tax if you only have a nexus with US states that have $0 sales tax rates.
You might be totally exempted or you may qualify for a reduced income tax rate when you do business as a non-US resident or a non-US registered business and you’re eligible for an income tax exemption under any existing double taxation treaties between your home country and the US.
Most Double taxation treaties often provides that if you’re a non-resident person or non-US registered company doing business in the US, you’d be exempted from paying income tax in the US, if you’re already paying income tax in your home country.
I recommend you research for any tax exemption treaties between your home country and the US, to determine if you qualify for a total exemption or a reduced US income tax for your business.
How can you do ecommerce business Canada and legitimately minimize your tax rates?
The law is different in each Canadian province, ordinarily you ought to pay income tax in Canada.
However, you will usually be exempted from paying income tax in Canada if your company is also registered in other countries which have a double tax exemption treaty with Canada and if you can prove that you pay income tax in that other country.
However, as of 1st April, 2021, Canada requires ecommerce businesses to pay HST/GST taxes. You can learn more about that!
The countries which have a double tax exemption treaty with Canada are:
United States of America, Australia, New Zealand, United Kingdom, Nigeria and many more.
More so, you’d need to declare that you are a non US resident by filling and submitting form W-8BEN to the IRS. The W-8-BEN form is available on the irs website.
Does filling forms on the IRS website and remitting taxes sound like to many workload for you? If yes, don’t worry, there is a way to automate all that process and will shall be discussing that below;
How do you automate tax filling in the USA for ecommerce businesses?
You can have all that tax filling and reporting to all the states where you need to file taxes for your e-commerce business done automatically!
Including meeting tax return deadlines, filling tax returns accurately, filling forms, reading up and following up with every new change to tax laws that applies to you to ensure your compliant and the list can go on and on!
You can automatically do all of this with a software called taxjar! It’s compatible with with Shopify, Woocommerce, Ecwid websites and more.
Taxjar has a free trail and puts US tax compliancy for e-commerce businesses on auto pilot.
You have this information now, so what next? Be tax compliant. It’s better to be careful than sorry.
Disclaimer: The information shared here do not represent that of a USA licensed tax agent. I shared this information on the basis of my own research. If you need professional advice on US tax laws, you should consult with a licensed USA tax agency or tax Lawyer.
This tutorial is part of our free dropshipping course. You can check our dropshipping course outline here.