Can someone help me wrap my head around taxes and what I have to charge.
I am setting up a dropshipping business as a Canadian resident, however due to the customs fee of items over $20 I have decided against shipping to Canada so I don't get angry customers with custom import fees.
I wish to focus on the US and Australian market, as both these countries can receive items without paying custom duties at a much higher amount.
I understand I have to pay income taxes on what I make, but what taxes do I need to charge customers is where I am confused.
Any help or guidance, the tax side is not my strong point.
Thank you for reaching out with your question, and I understand that taxes can be confusing!
For the USA, the general rule of thumb is that you only need to collect and charge taxes in states where you have a tax nexus. If, for example, a merchant has offices in New York and California, and a warehouse in Texas and Pennsylvania, these would likely constitute as physical nexuses, and the merchant would need to charge and pay sales taxes when customers in these states order from them. If a customer in another state placed an order, the merchant would not need to collect and pay sales taxes if they do not have a presence in that state. As you are based in Canada, if you do not have any physical tax nexuses in the USA you likely would not need to charge your US-based customers any sales tax, nor would you have to pay any.
However, there is also something called an economic tax nexus, which means you have to collect or remit sales if you meet certain criteria. This threshold is usually a minimum amount of revenue or transactions placed with your store from a state. More information on this can be found in our blog post Online Sales Tax: A Guide to Economic Nexus & Ecommerce, which includes a section dedicated to economic nexus laws:
The “economic nexus criteria” used by states to determine whether a retailer is liable for sales tax varies by state, but all help to level the playing field between non-collecting out-of-state sellers and the brick-and-mortar retailers located within.
For example, a remote seller (online or offline) in South Dakota will trigger economic nexus when they generate $100,000 in taxable sales or 200 separate taxable sales transactions delivered into the state during the current or previous calendar year. Yet, Ohio’s economic nexus law only applies to merchants that sell over $500,000 of taxable receipts into the state.
I would recommend reading the full blog post for more information.
For Australia, I am not as familiar with sales tax laws there, although I don't believe businesses are required to register for GST until their annual revenue exceeds $75,000 AUD. Sufio offer a good blog post on Australian taxes here.
I hope this has helped, and would encourage you to do your own research as well so you are aware of your tax obligations for each country you sell to. If you're still unsure, I would recommend contacting a tax professional to gain confirmation.
Victor | Shopify Social Care
Thank you for your reply.
I will be dropshipping from China to the USA and Aus. So as the products will be coming from China directly to the customer I am under the understanding I wont need to collect tax?
Thank you for the links, I will do some further research to ensure I get it correct.
Yes, I believe that will likely be the case. If the goods are coming from abroad and you have neither any physical or economic nexuses in the United States, you shouldn't need to collect or pay sales taxes there. The same will likely apply to Australia as you presumably will not be at the GST registration threshold when starting out. These countries may have various import laws you'll need to be aware of, however, and you may also want to look into what your responsibilities are in terms of registering your business in Canada if that's where you personally are based.
There are a variety of great resources out there, including tax-related blogs provided by Avalara and TaxJar. As mentioned before, though, consulting with a tax professional is the best way to be sure of your tax obligations in the countries you plan to sell to.
Victor | Shopify Social Care
To further this question, specifically im looking for this tax answer:
- I am a canadian company, dropshipping from a US warehouse to US clients.
Would there be taxes that needs to be charged? which tax? box the physical and economic nexus?
Also if indeed there is, Do I need to pay the Canadian taxes in addition to the US taxes? how does one pay the US taxes?
If you are using a US-based warehouse to ship products to your US customers, that warehouse may constitute as a physical nexus for the state it is in. If that is the case, you would likely need to charge customers sales taxes if they are based in the same state as the warehouse, and register for a sales tax permit in that state so you can remit any payable sales taxes due to the state-level tax authorities. You would need to determine, first and foremost, if using the warehouse to ship products from constitutes as a tax nexus in the state it is located in.
In terms of the economic nexuses you may have, this is typically based on either a minimum amount of revenue earned from sales to a specific state, or a minimum number of orders or transactions. If you are starting out you will likely not have an economic nexus in any state until you start generating a number of orders, but I'd recommend familiarizing yourself with the tax laws of all states you intend to sell to ahead of time. I'd recommend checking out TaxJar's state-by-state guide for more information.
For Canadian taxes, if you are not selling any products to Canadian customers then you may not be required to pay any sales tax to either the provincial or federal governments in Canada. If you operating your business out of Canada, you may still wish to investigate and determine what your tax obligations are, even if you are only selling to the USA or abroad.
Finally, I did a bit of research into this for you, and came across this third-party blog article which seems particularly helpful and relevant to your situation. I'd suggest giving it a read to learn more but as mentioned before, if you are unsure on what your obligations are from a tax perspective after doing your own research, consulting with a tax professional is the best way to clarify your situation.
Victor | Shopify Social Care