Dropshipping Taxes & Legal: Nobody Tells You About Dropshipping

Who has to pay taxes in dropshipping and what are they?

Because no capital is tied up by inventory & storage space, dropshipping is a very successful business model in online retail.

This business model is also attractive from a tax point of view, because some taxes can be omitted with dropshipping.

Read this guide to the end if you're a dropshipper but still don't know exactly when dropshipping taxes are eliminated and how to optimize your Shopify dropshipping business so you pay as little tax as possible.

Short note from my lawyer

Here are some sound, but based on personal experience, recommendations gathered.

It should also be emphasized that I cannot accept any liability in the sense of the tax consulting professions for the correctness of the contents in this text.

Use this text as an introduction to the topic and as preparation for a must-attend consultation with a licensed tax advisor designated for this topic.

Do not in any case deduce actions from reading this text, but inform yourself further on this subject!

Quick comment: What follows now is not meant to discourage you from starting your dropshipping business because of its complexity.

Everything you read here is self-evident and a no-brainer for any good tax accountant.

This one will also love to assist you in doing your dropshipping taxes.

Tip: Outsourcing is always better than doing things yourself.

Shopify Dropshipping: What does that mean in terms of tax law?

The video is unfortunately NOT from me. But I find the content very good and appropriate. If I find something good, I share that 🙂

Dropshipping is a successful model.

More and more often, a web store operator does not own the goods he sells to his customers himself, but, when placing an order in the web store, commissions a wholesaler to ship the goods to the customer on his behalf.

For tax purposes, this type of delivery by shipment is a moving delivery because there is transportation or shipment to the customer.

Any movement of an object is a transport.

A shipment is a transport in which an item is sent to the buyer. Dropshipping with your Shopify web store is always a shipment.

For tax purposes, dropshipping is defined as a series transaction. 

This is a turnover transaction, which several companies conclude about one object, where a shipment from the first entrepreneur to the last recipient in a row of at least three people takes place. 

The dropshipper acts as an intermediary.

Sales transactions are subject to sales tax. Therefore, you must first deal with the sales tax in dropshipping.

Dropshipping Taxes: The sales tax

As for any delivery, taxes must be paid for dropshipping.

To understand when taxes apply to dropshipping, you need to familiarize yourself with the concept of the Place of delivery for series transactions deal with.

In series business, there is a chain from a first supplier to a last buyer.

Between them stands the dropshipper.

The first supplier delivers to the dropshipper first, he just does not send the goods to him. 

However, for tax purposes, the first delivery is a moving delivery to the first customer, not the last.

This is because the web store has the goods shipped directly to the customer.

As the customer, he is the purchaser of the moving consignment.

Sales tax follows the invoice route, not the physical shipment route.

That is:

First, there is a VAT-liable delivery from the consignor to the seller.

The Seller shall receive an invoice from its supplier showing the statutory value added tax.

For the last buyer, the seller, not the shipper, is the supplier of the goods.

The shipper only ships them.

The place of delivery is either the front door of the last customer or, in the case of shipment by an independent carrier, the place of delivery to the carrier.

In any case, the delivery of the seller to the buyer is another, second delivery for tax purposes, which is also subject to VAT.

This delivery is a non-moving delivery because the transport is already part of the first delivery.

As a seller, the webshop in turn sends an invoice to the customer and shows VAT on this invoice.

These are the taxes for dropshipping if all persons involved in the chain transaction have their company or residence in Germany.

Trade tax and corporate income tax can be waived here, because these taxes have nothing to do with the business model. 

For sales tax purposes, note,

• that a series transaction includes several deliveries;
• That each delivery is to be invoiced;
• that sales tax must be shown on every invoice.

Dropshipping Sales Tax in USA & International

The good thing about setting up an international or American online store is that you don't have to pay sales tax.

Sales taxes are due for your Shopify store only in countries like EU, Switzerland, Japan, Norway and South Africa. 

So you can easily exclude these countries in your ads. 

Intra-Community chain transactions in dropshipping

Cross-border series transactions are partly non-taxable, partly they are subject to tax relief, and partly they are subject to customs duty.

There are several cases to consider here.

Series transactions to other EU countries and from other EU countries to Germany are likely to be particularly relevant because in these cases with dropshipping taxes are saved can.

Dropshipping B2B in the internal market: intra-community triangular transactions

First, consider the case where a web store registered for tax purposes in Germany is purchases a product in another EU country, which is directly from the supplier to a business customer of the webshop in Germany is shipped. 

This transaction is an intra-community triangular transaction.

Without tax law simplification, it would be:

The German webshop makes an intra-Community acquisition in the supplier's country.

If there were no simplifying regulations, he would have to file a sales tax return in this state in order to recover the input tax included in the invoice amount.

Customs duties would not apply, but in Germany he would now be making a domestic delivery to his customer, for which he would have to calculate and pay sales tax.

Thanks to the European simplification of the VAT law sales tax is easier to handle with dropshipping. 

In the case of intra-Community triangular transactions, the VAT applies in the state of the first delivery as settled. 

The webshop that purchases in the Community territory, therefore does not have to register for tax in other EU states. 

In the case of a triangular transaction, the last customer also pays the VAT for the domestic supply.

The webshop has exclusively the Obligation to report on the intra-Community triangular transaction in the state in which it is registered with VAT ID is.

In Germany, intra-Community triangular transactions must be reported in the Elster form and transmitted online to the tax office. Intra-Community triangular transactions are attractive for online wholesalers.

Notice,

• that all three persons involved must be companies;
• that the first delivery must be the moving delivery;
• that the first supplier and only he must be located in the European foreign country.

Since 2020, triangular transactions can also be conducted in a simplified manner with participants from three different EU member states.

Intra-Community chain transactions in the case of dropshipping with a private individual as the ultimate customer

In the case of a delivery to a private person without a trade or to a commercial customer without VAT ID there is no triangular transaction. 

If a customer purchases an item from a webshop in Germany that has this item dropshipped directly from a supplier in the Community territory to the German customer, then the webshop is making an intra-Community acquisition, which is taxable in Germany under EU law. 

The Supplier from other European countries does not charge sales tax.

The German company cannot claim an input tax deduction. 

In Germany, a non-moving delivery is made by the webshop to the private customer, on which the webshop has to calculate and pay sales tax.

If the last customer does not have a VAT ID, then he is a private person or a semi-entrepreneur. 

The non-moving delivery of the web store to him is then subject to German VAT.

In this case, please note that you cannot claim input tax for your purchases in other EU countries.

You have to pay sales tax on your sales in Germany.

This comes off your margin. 

That's why it's even more important that you know your metrics.

Best you calculate your margins immediately with my Software tool to calculate profit margin, so that you always know exactly how much you can spend to win a customer profitably.

Series transactions with customers in Austria

In contrast to German tax law, Austrian tax law only speaks of a triangular transaction in the case of chain transactions between three companies from three Member States, and of chain transactions in all other cases where a first supplier delivers directly to a last buyer.

If the first supplier is a German company that delivers directly to a last customer in Austria on behalf of an Austrian webshop, then the simplified rule for VAT applies if this last customer is an entrepreneur.

This means: 

The first supplier from Germany does not charge VAT to the Austrian webshop.

The last customer pays VAT on the intra-Community acquisition as an Austrian company.

If the intermediary is a company registered for tax in Germany, the first delivery from the German supplier to the German webshop is taxable in Germany.

As long as the webshop Not proven has that this is an intra-Community acquisition in another EU country, German VAT must be paid.

Only if he provides proof that it is an intra-Community acquisition in Austria as the last place of delivery, he can settle in Austria according to Austrian tax rates.

In this case of dropshipping to Austria, the webshop operator must therefore register for tax purposes in Austria.

Because this part of the series transaction is a non-moving delivery, it must be there Calculate the sales tax to the last customer and pay them to the tax office. 

If the last customer in Austria is a private person, German VAT must be calculated and paid to the tax office in Germany.

With one exception: Intra-community purchases of new cars are taxable by the buyer in the destination country (but who sells cars with the dropshipping model?! If I missed something here, write it to me in the comments).

Series transactions with customers in Switzerland

If a German webshop commissions a German supplier to make a delivery to a customer in Switzerland, then this delivery must be accompanied by an invoice from the German webshop to the last customer in Switzerland.

It must be marked "Tax-free export delivery". For each product there is a commodity tariff number which has to be declared electronically to the German customs via the automated tariff and customs clearance system Atlas.

Since 2018, foreign companies are with a worldwide turnover of more than 100,000 euros is subject to VAT in Switzerland. 

If your Shopify Store reaches this value, you have to calculate sales tax according to Swiss tax rates for deliveries to Switzerland and pay this tax in Switzerland.

So if you feel like selling to Switzerland and are not based there, this is a very clear advantage for you. 

You also need to register your business with the federal tax authorities, appoint a tax advisor in Switzerland and deposit a bond with a bank in Switzerland.

Sales tax returns must be filed quarterly.

How does a dropshipping delivery through your Shopify webshop to Switzerland work?

The first supplier based in Germany charges the webshop, also based in Germany, for the moving delivery with VAT.

The German online store registers the input tax deduction.

The export delivery must be declared to customs.

If the value exceeds 1,000 euros, the declaration must be made electronically via Atlas, indicating the EORI number. 

When imported into Switzerland, the goods must be cleared through customs.

Most often, this must do the buyer. 

However, the supplier must provide the German customs authority with the eight-digit Goods tariff number Communicate.

Do you make more than 100,000 euros in sales per year, you must register your Shopify store for tax purposes in Switzerland, be represented by a local tax advisor, pay the deposit, and file a quarterly sales tax return.

The customer in Switzerland receives an invoice with sales tax.

Import from and export to the USA

Imports from the USA

Many Shopify online stores offer products from suppliers in the USA. 

If they, as buyers, import the goods and bear the costs, the following cases occur:

• Value of goods up to 22 Euro: Only excise tax (for example tobacco tax) is payable.
• Value of goods over 22 to 150 euros: import sales tax and excise tax must be paid.
• Value of goods over 150 euros: Customs duty, import sales tax and excise tax are payable.

For tobacco and tobacco products, alcohol and alcoholic beverages, as well as perfumes and eau de toilette, customs duty, import sales tax and excise duty are payable regardless of the value of the goods.

The sales tax rates are 7 and 19 percent. 

However, I don't recommend selling these types of products when you start dropshipping.

Much more suitable cool gadgets. 

Exports to the USA

For German entrepreneurs, exporting to the U.S. is just as important.

A large market that has completely accepted the internet can be of great importance for the sales of your Shopify web store.

That's why this business model is my absolute favorite. 

Several duties are due when importing into the U.S., and there are ways to save on taxes when dropshipping.

For imports from Europe, the general tax rates apply. This means that there are neither aggravations nor facilitations.

In accordance with international customs agreements, the Harmonized Tariff Schedule of the United States includes 97 chapters listing tariffs for all product groups.

Some agricultural products, as well as electrical equipment and machinery, may be tax-exempt.

Note that steel and aluminum and many products from China have been subject to punitive tariffs since 2018.

Supplemental Chapter 99 of the Tariff Schedule lists many exceptions.

From these product groups and the tax base, the customs tariff for a particular import can be calculated.

The basis of assessment is the transaction value of the goods, although some special features may lead to tax relief.

With a Goods value over $2.500  becomes a Customs clearance fee of 0.3464 percent of the value of the goods free on board (fob value) is due. 

A very fair value, in my opinion.

In addition, there are further fees for port and customs agency.

For imports into the U.S., the First Sale Rule can be invoked against Customs and Border Protection (CSB) if an independent intermediary is the first buyer in the U.S. in a multi-stage distribution that is demonstrably intended for sale in the U.S. from the outset.

The First Sale Rule implies that the value of goods may be recognized as the transaction value of the first sale.

In other words, the import is based on the purchase price of the first buyer.

It may make sense to create an independent entity locally for regular exports to the US.

This middleman then distributes the goods as a wholesaler in the States, for example to web stores.

Which country, which type of company, which trade?

Apps from suppliers that specialize in dropshipping are available for your Shopify store. Dropshipping is an attractive business model for fast growth.

You can maximize the benefits of dropshipping and solidify your own role in the supply chain by making your strategy international.

But you have to make some decisions:

• Which countries do you want to ship to?
• In the case of intra-Community supplies, triangular transactions with companies as the last customers in one of the Member States are of interest.
• If you want to export to the USA all the time, it can be interesting to move your company's headquarters to the States in order to be able to import at more favorable conditions.

General:

Are the markets for your Shopify store states outside the EU, then reflect on the location and the form of the company. 

The German GmbH law knows high requirements and high taxes.

An LLC (limited liability company) in the USA can be advantageous for you. 

However, in the case of intra-European trade, it should also be borne in mind that the requirements for companies with limited liability are different in every European country, as well as the taxation of companies. 

If Germany is not your most important market anyway, it is worth considering relocating your headquarters to the USA, Ireland or Estonia, for example, from a tax perspective.

My conclusion

If you want to get the most out of your dropshipping taxes, you should set up your online store in the USA and form an LLC. This will save you German VAT and various customs duties etc. 

In addition, the U.S. has much more purchasing power than Germany, as every American has a credit card with a drastically higher limit.

Outsourcing is also easier with international forces, but that's obvious when the market is bigger. 

It is also possible to travel completely tax free, but that is topic for a separate guide and requires a certain lifestyle.

Did I forget anything in this guide or do you need more info?

Write me your questions in the comments and I'll help you as best I can.

FAQ - Frequently asked questions