Dropshipping can, on the surface, seem like an easy way to make money online. However, if you do not plan your taxes correctly, you could end up in a lot of trouble with the law.
Taxes on products and imports vary from country to country, even within one state (if we’re talking about the USA). This can make understanding all of your obligations hugely difficult.
This post will outline some things you need to be aware of as a dropship seller. However, it is no substitute for talking to a professional financial advisor and solicitor, who can help you plan your collection and repayment of taxes.
If you are setting up as an online business in the UK, you will need register with HMRC as you may be required to pay Customs Tax if you import from outside of the EU (pre-2019). For a package that is worth more than £18, this could be as much as an extra £8-£15 to get it to your UK customer’s doorstep.
Do bear this in mind when setting your pricing in every country that is relevant. You may need to add a note to your product pages, as well as make it explicit in your terms and conditions and any other relevant pages throughout your site.
Also, you may also want to reconsider your inventory’s suitability to be part of a dropshipping model. For example, if it is a deemed a ‘low value’ good, you may not be required to pay an additional tax. However, a bigger site could supply the same product in half the time it takes for you to ship it. You may find that lower value, customised and unique goods may be a more profitable fit.
Planning your tax and being clear on your business plan and profit margins should be just as much a priority as your branding and marketing.
Selling To Countries Within The EU
Currently, as the UK is part of the EU until March 2019, you can gain professional advice on your distance selling obligations within the customs union.
However, as the negotiations are not yet complete at the time of publishing, it is hard to say what will change look like for ecommerce sellers once the switch has been made.
As a business owner, you should plan for increased shipping costs and ensure that your website and tax collection systems are future-proof. This may involve updating applications and keeping your eye on the news in finance and your industry.
From a legal standpoint, you will need to check with a lawyer who is experienced in the sales tax laws of the country of your suppliers. This will ensure that you are not caught out.
In the case of those outside the EU, besides complicated rates systems (such as within the US), you will also have to contend with delivery times. In some cases, this can be up to five weeks. Taxation in these cases, can be calculated and recorded with the help of various accountancy apps. Suppliers like Aliexpress also make the process of automatically working out takes more simple.
Further, if you are using a supplier in China, you will have to ensure that your customer is aware that they are paying the customs fee for the product’s delivery. On top of this, there may be an extra-regional tax charged.
Marketplaces And Digital Products
If you are selling digital products, you will need to check the individual taxation rules regarding each country as there may be variants in charge. Similarly, if you are selling drop shipped goods through an established online marketplace (such as eBay), you will find different processes and tools to automate tax collection.
Selling Within The USA
If you are a UK business owner selling to residents of the US, good news. Your sales tax collection is relatively straightforward. If you do not have a supplier or remote employee in the US, you do not have ‘nexus,’ and you are therefore not eligible to pay sales tax.
If you do have nexus in America, you must charge the correct rate for your customer, according to their location. And, this can be different between cities in the same state. You can find accounting apps that automate the correct charge for you.
To make the process of bookkeeping easier, look to installing a currency converter from your ecommerce store. You can also set up a dedicated US site (and translated sites for all of your other markets) to make the process of managing tax collection a breeze.
Dropshipping and taxation pricing and processing will be unique to every online business, so it is worth seeking professional advice. Once you are up and running and set up with automated tools to keep your recordkeeping in order, start reconsidering the products you’re selling and how you are marketing them. You want to ensure that you remain compliant and profitable.