Guide to Dropshipping Taxes 

Two dropshipping business owners using TaxSlayer to understand their sales tax requirements.

Tax requirements for dropshippers differ significantly from other online retailers due to the unique nature of the dropship business model. Unlike traditional e-commerce, where retailers maintain and manage inventory, dropshippers don’t hold stock.    

Instead, they fulfill orders by purchasing products from third-party suppliers who ship directly to customers. This distinction impacts various tax aspects, such as sales tax, income tax, and potential nexus considerations. This article will help you understand how dropship taxes work and ensure you stay on top of compliance.   

Dropshipping taxes you may owe 

Federal income tax  

Dropshippers pay federal income tax on their business profits like other business owners. The income generated from dropshipping activities is considered taxable.   

As a dropshipper, you are likely considered self-employed. Depending on how your business is categorized (sole proprietorship, partnership, corporation, or S-corporation), you will also pay self-employment tax on your federal return. Self-employment tax covers Social Security and Medicare contributions and factors into your overall tax liability.  

State income tax  

In addition to federal income tax, dropshippers may also be subject to state income tax. The specific requirements and rates vary by state. Some states do not impose an income tax.   

Sales tax  

Sales tax is a tax imposed on the sale of goods. However, sales tax regulations differ across states. Some states may require out-of-state resellers or dropshippers to collect and remit sales tax, while others may not.   

Sales tax is important to consider as a dropshipper because your dropshipping sales tax requirements will be unique to you depending on the state you do business in, where your supplier is located, and where your customers are.  

Import duties and customs  

It is common for dropshippers to source their goods from suppliers located outside of the country. For dropshippers involved in international trade, import duties and customs taxes become relevant. Custom duty rates vary from 0 – 37%, depending on the type of merchandise and exporting country. The average customs tax is about 5%. Understanding how imported goods affect your tax liability will help you avoid unexpected costs and ensure compliance.  

How much do dropshippers pay in taxes? 

Your tax liability as a dropshipper will vary based on several key factors, like business income, business deductions, and the structure of your business. To estimate your tax liability, start by tracking your business income and eligible business expenses.   

Then, review state sales tax requirements for any state where your business operates. You’ll need to determine if you have a sales tax nexus in those states. If you are sourcing products internationally, consider any applicable international trade taxes.   

Read also: Starting A Business and Wondering About Taxes?  

Understanding dropshipping sales tax 

Drop-shipped items are still subject to sales tax. However, it will only happen at some stages of the transaction. Generally, the customer will always pay sales tax as the end user of a good or product. Then, as the reseller, you will remit sales tax to the state taxing authority. Ideally, you will provide your supplier with an exemption certificate to avoid paying additional sales tax when purchasing.  

Not all drop shippers must collect sales tax, as this requirement depends on factors that create nexus. A state can establish a nexus through inventory storage, sales volume, or physical presence. If you have a nexus in a state, you must determine the correct sales tax rate for each transaction. Some states may calculate sales tax based on the wholesale price, while others may calculate it based on the retail price. 

What is a sales tax nexus? 

A sales tax nexus refers to a connection or presence a business has in a particular state, which requires the company to collect and remit sales tax on transactions within that state. Two factors determine if this connection constitutes a sales tax nexus. 

  • Physical presence like an office, store, or warehouse OR  
  • Economic presence by meeting economic thresholds such as a certain level of sales or transactions within the state   

In states like Georgia, marketplace facilitators must collect sales tax if their total taxable sales equal or exceed $100,000. Other states may have specific qualifiers in addition to a sales threshold. For example, in the state of California, a sales tax nexus is triggered if you have either sales equal to OR exceeding $500,000 or a physical presence including:   

  • Maintaining inventory or office locations  
  • Having representatives in California (sales, customer service, delivery drivers, or installers)   
  • Leasing equipment, including computer servers   

Note: If you work with a fulfillment provider, like Amazon, eBay, or Shopify, with an established sales tax nexus, you may, by extension, still be required to collect sales tax from customers.   

For example, let’s say your fulfillment provider has a warehouse in California. Even if your sales do not meet the minimum threshold and you don’t have a physical presence in the state, you may still be obligated to collect sales tax based on your fulfillment provider’s sales tax nexus. You should check with fulfillment partners to see if their sales tax requirement extends to you as the dropshipper.  

Because each state has unique parameters for out-of-state resellers, you must review the state department of revenue for any state connected to your business.    

If you can prove that you do not have a sales tax nexus in the state, you are not required to collect sales taxes. By conducting a comprehensive review of each state’s guidelines, you can ensure compliance with the dropshipping tax requirements associated with your business.   

How to file taxes for dropshipping  

The tax filing process for drop shippers typically involves several key steps. Firstly, you need to accurately track your sales and revenue, including any applicable taxes collected from customers.  

How you file your dropshipping taxes depends on the structure of your business, such as sole proprietorship, partnership, or corporation. For example, sole proprietors report business income and expenses on Schedule C of their individual tax return (Form 1040), while partnerships and corporations (Schedule K-1) have separate tax filing requirements. 

Dropshipping tax exemptions 

Generally, states consider dropshipping similar to online reselling. As an online reseller in the state, you may qualify for a sales tax exemption by applying for a sales tax certificate. You can present the sales tax certificate to your supplier to indicate that you are not required to pay sales tax on goods purchased for resale.  A good place to start is by applying for a Uniform Sales and Use Tax Resale Certificate, which makes you exempt in thirty-six states with a single form. 

Beyond claiming exemptions, you can also reduce your tax liability by: 

Read also: Tax Deductions for New Businesses 


Are you looking for some quick answers? Check out these FAQs, highlighting the most common questions about how taxes work with dropshipping.  

Do you have to pay taxes on dropshipping? 

Yes, dropshippers are subject to various taxes, including federal and state income taxes. The income generated from dropshipping activities is taxable. 

How do I avoid taxes when dropshipping? 

Staying on top of your tax obligations is the best business practice. Instead of trying to avoid taxes, as a business owner, you should focus on optimizing your tax strategies. For dropshippers, optimizing your tax strategy includes: 

  • Accurate record-keeping 
  • Understanding eligible business deductions 
  • Analyzing tax requirements associated with fulfillment providers and international suppliers 

Do dropshippers pay import tax? 

Yes, dropshippers involved in international trade may be subject to import duties and customs taxes. The importer typically pays these taxes. Therefore, you should consider these additional costs when dealing with cross-border transactions. Staying informed about import regulations will help you avoid unexpected expenses.  

Who pays sales tax when you dropship? 

The end consumer is generally responsible for paying sales tax. However, as the dropshipper, you may be required to collect and remit it to the relevant tax authority. This obligation arises if the dropshipper has established a sales tax nexus in the consumer’s state.  

TaxSlayer makes it easy when it is time to file your taxes. Do you want a little more support? TaxSlayer Self-Employed offers all the right support for your unique self-employed tax situation. 

This article is intended to provide general information to the public and does not provide personalized tax, investment, legal, or business advice. You should seek the assistance of a professional for advice on taxes, investments, and any other financial, legal, or business matter pertinent to your individual situation.