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MAJOR UPDATE: How to Pay Tax When Dropshipping (How to Pay Sales Tax with Shopify) - YouTube
Channel: Wholesale Ted
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Question one: what taxes do I need to pay
when dropshipping?
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When dropshipping, there are two main types
of taxes that you need to pay.
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The first is income tax, and the second is
potentially sales tax.
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Income tax is the easiest, so let's start
with that first.
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How do dropshippers pay income tax?
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Income tax, for those of you that don't know,
it's a tax that you pay on the profit that
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your store makes for the year.
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That profit is your income.
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The same goes if you have a job.
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If you had a job, then you will be paying
income tax on your wages and with dropshipping,
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we pay income tax on the profit of our store.
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So if you don't make a profit, then you don't
pay any income tax.
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In fact, you can often claim your losses as
a tax credit.
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One of the most common tax questions that
we get asked here on this channel is this:
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if I live outside the United States, maybe
I live in Australia, but my customers are
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based in the USA.
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Who do I pay my taxes to?
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Do I pay my income taxes to the USA government
or do I pay them to the Australian government?
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The answer is that you pay to your government,
so if you live in Australia, it doesn't matter
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if your customers are in the USA, you pay
your income tax to the Australian government.
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You may also live in a country like the USA
where you not only have to pay income tax
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to the federal government, but you also have
to pay it to your local state, as well.
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If you live in a country like that, then yes,
you are obligated to pay income tax to both
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the government and to the state.
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Of course, you can live in a country like
New Zealand where we don't have states and
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you don't need to worry about that.
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Ad please, please, please do not ask me what
your local income tax laws are.
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I get asked questions like, "Sarah, what are
my tax obligations if I live in Iceland?"
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Honestly, though, I don't know because I live
in New Zealand.
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I don't live in Iceland.
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I don't know every country's income tax laws,
so please, please, please do your own research
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here.
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So, that's your income tax obligations.
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Let's move on to the trickier issue which
is sales tax.
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Question two: what is sales tax and do I need
to pay it?
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For those of you that don't know our sales
tax is when a governing body places a tax
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on goods or services sold within their jurisdiction.
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In New Zealand, it's our federal government
that does this and our sales tax is called
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GSTE.
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The New Zealand government requires us to
collect and pay it to them.
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In the United States though, it's different.
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It's not the federal government, i.e. the
one that Donald Trump is the president of
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that manages sales tax.
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Instead in the USA, it is individual states
that do this.
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Each state can sit their own tax rate and
they can also within reason set their own
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tax laws.
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And there are some states in the USA that
thus sales tax havens.
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No one is required to collect and pay sales
tax within them.
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Yay.
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But of course, if you may have suspected,
the majority of states in the USA are sadly
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not sales tax havens.
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Now, here's where things have changed from
my previous video.
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In the USA, there used to be a law that required
you to have to have something called nexus
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with an estate before you were required to
collect and pay sales tax to it.
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Nexus, for those of you that don't know is
a legal term, it means that you have a sufficiently
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large physical presence within a state to
be required to collect and pay sales tax to
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it.
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To better explain nexus, let's use an example.
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Let's say that you are a citizen of the United
States and you live in Arizona.
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Well, you have a house in Arizona.
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You live in Arizona, that's a pretty big physical
presence, right?
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Well, that means that you have nexus within
it and so because you've got nexus in it,
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it means that you are required to collect
and pay sales tax.
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In the past you only had to pay tax to states
that you had nexus in.
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So let's say a customer comes to your store
who also lives in Arizona and they buy a mug
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for $15.
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Well, you are required to charge and collect
sales tax on that order because you have nexus
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in Arizona.
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Your sales tax rate is 5.6%.
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So in this case here, the text to collect
is 84 cents.
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You are required to pay this 84 cents to the
state of Arizona when tax time comes around.
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But in the past, let's say that you got a
second order and this time your customer had
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come from Texas.
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Well, you didn't live in Texas.
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You owned no property in Texas.
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In fact, you had nothing to do with the state
of Texas.
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Because of this, you had no physical presence
in Texas, and thus you didn't have nexus in
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it.
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The sales tax rate for Texas is 8.25%, but
because you didn't have nexus in it, you didn't
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need to collect and pay any sales tax on that
order.
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This meant then that if you didn't live in
the USA, maybe you lived in the UK, that you
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usually had no nexus in any state, so you
usually weren't required to collect or pay
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any sales tax at all for USA customers, which
was a really nice bonus.
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This law was set in 1992 after a different
Supreme Court case, Quill Corp versus North
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Dakota.
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It was ruled that nexus was required to collect
and pay sales tax, but that law was recently
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abolished by the new Supreme Court ruling
on June 21st.
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Here's what happened.
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In 2016, South Dakota passed a Kill Quill
bill.
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In it, required out of state vendors regardless
of nexus to collect and pay sales tax if they
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were making over $100,000 a year in sales
or doing more than 200 transactions in the
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state of South Dakota.
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Well, the online furniture retailer Wayfair
was not happy with this new law and they took
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South Dakota to court over it and of course
they lost.
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In a five to four decision, the Supreme Court
ruled that the previous 1992 ruling was out
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of date with the current age of the Internet
and said that South Dakota was allowed to
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pass their bill.
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Question three: does this now mean that I
have to collect and pay sales tax within all
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the states in the USA?
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No, no, no.
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It doesn't.
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The South Dakota versus Wayfair ruling sets
two very important precedents.
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Firstly, yes, it does set the precedent that
states are now allowed to pass your own bill
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that will require out of state vendors to
have to collect and pay sales tax.
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However, it is important to note that until
states have passed legislature, the old rule
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still applies and most states have yet to
actually do this.
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So yes, that is one precedent.
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But it sets another.
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The South Dakota versus Wayfair ruling was
affirmed by the Supreme Court, but that bill
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was aimed only at large online retailers.
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Again, to be eligible under this new law,
you've either have to be doing over 100,000
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dollars a year in sales and South Dakota,
or be doing over 200 transactions.
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When other states passed their own laws, they
will need to be aimed at large online retailers
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as well to meet this precedent.
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If they want to expand that to include everyone,
a new court case will be required.
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So here's the thing.
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If you are new to dropshipping then you are
not required to collect and pay sales tax
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within any state that you don't have nexus
in, so don't worry about it.
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Once you get to the stage of this law impacting
you, you will be making more than enough money
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to hire an accountant to manage all of this
for you, and the chances are even after all
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the states have passed their own version of
this bill, you're probably only going to be
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collecting and paying sales tax to a small
percentage of the states anyway.
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Most likely, the larger ones like New York.
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So let's calm down and figure out how most
of you should be collecting sales tax by asking
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yourself one important question.
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Question: do I have nexus in any state in
the USA?
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For most people, the only way that they're
gonna have nexus in a state as if they live
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in it or if they own property in it.
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There are some more obscure ways that you
can have it, so if you suspect that you might
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be under these clauses, you should be sure
to to seek an accountant.
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And if you live outside the United States
and you don't have nexus in any state, then
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simply don't worry about it.
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Until you start making lots of money, this
isn't going to impact you and you can probably
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go away and leave this video right now.
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But if you do have nexus in a state, then
you are obligated to be collecting and paying
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sales tax within it.
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Luckily though Shopify makes this very simple.
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All you've gotta do is sign into your dashboard
and click settings.
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On the settings page, click Texas.
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Once the page loads, come and click on the
United States.
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Next you'll need to let Shopify know which
states you have a physical presence in.
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Type in the state and select it and give your
zip code.
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Shopify will only let you add in tax settings
for countries that you have a shipping option
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to.
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This store only has a shipping option enabled
to the USA, which is why that is the only
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country that showed up in my list.
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Once you've done that, come and click on products
and open up each of your products.
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I'm going to be opening up one of mine in
the store, the camera lens travel mug and
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show you how to enable taxes on it.
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So all you've got to do is scroll down to
the pricing box and took the check box there
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and once you've done that, click save.
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If you're eligible for sales tax, I recommend
that you go and you tick it each time that
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you add a new product.
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Shopify will automatically collect the right
amount of sales tax for the order, which is
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very handy because in some states, the amount
of tax that you need to pay will change depending
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upon what city your customer lives in.
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For example, this is very relevant in the
state of New York.
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I went in and did a $10 test purchase in my
store and I put in my address for the first
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purchase to be from New York City and the
second one to be from Buffalo.
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Despite both being located in the state of
New York, the taxes charge for each were different
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since not only does the state of New York
charge a 4% tax on both sales, but each of
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these cities has their own individual taxes
to collect and pay as well.
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So the taxes for New York City are slightly
higher than for Buffalo, but because Shopify
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automatically calculates this for you, you
don't need to worry about it.
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So, hopefully meeting your tax obligation
seems a little bit less scary.
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If you liked this video and you found it helpful
and you'd like even more videos about creating
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a real dropshipping business, then be sure
to subscribe to Wholesale TED and click that
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And let you know that we here at Wholesale
TED have a premium, over the shoulder training
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program called the Drop Ship Club.
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It teaches you how to set up a dropshipping
store from start to finish, and if you would
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like to join that, simply click on the link
in the video description below.
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And before you run off, I've got one last
freebie I'd like to give you.
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Here at Wholesale TED, we have a free ebook
that teaches you the six steps that six figure
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dropshipping stores follow to make over $10,000
every month.
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To get that ebook for yourself, again, simply
click on the link in the video description
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