Are you dropshipping? Or you are researching how to dropship, but are you wondering what to do with taxes like the sales tax and VAT? Well, don’t worry anymore! In this awesome guest post from Quaderno, you learn everything that you need to know about the taxes for when you’re dropshipping.

The dropshipping model has become increasingly more popular because of the ease and flexibility with which entrepreneurs can start and run their online business. But this model can run into tricky territory regarding one ever-complicating reality of ecommerce: sales taxes!

At Quaderno, we remove the confusion and stress around sales tax. Our goal has always been for business owners to forget about tax compliance so they can give their business the attention it deserves. That’s why we not only created our software solution, but we also love offering helpful insights on how to deal with sales tax while dropshipping. Hope this helps!

How does sales tax work with dropshipping?

Your Dropshipping Business, in a Nutshell

In dropshipping, there are two purchases at play for one product: the customer buys from the retailer, then the retailer from the supplier. So when is sales tax charged and collected, and by whom?

In this post, we’ll explain the general rules around sales tax for dropshippers, plus how to comply with tax rules in major world markets. 

Some legal steps to get your dropshipping business up and running in the US

The first step must be to make your business official, and decide which type of business you want to set up.

In theory, if you are doing business, you should register as an entity.

Our advice is always to consult a professional (an attorney, a tax advisor, or an even accountant) because each state has different requirements. 

Also, you might need to get your Employer Identification Number (EIN), a sort of a Social Security number for a business used by the IRS to identify them. You can apply for one online here. However, you might not need one, in order to find out simply check out this site

Finally, since most dropshipping businesses are run at home offices, a local business license might not be necessary. But it’s always best if you contact your city to find out if you need it or not.

Pretty straightforward up until now, isn’t it? BUT, there can be complications, though, and one of the big ones is tax.

Ultimate Guide to US Economic Nexus
Everything you need to know to eliminate the confusion & frustration of complying with the US Sales Tax Economic Nexus
Click here to get the free guide

What Is Sales Tax?

Sales tax is a form of consumption tax, applied to the purchase of goods and services. The end customer pays the tax, because they are who’s actually consuming the end product. And it’s a tax on consumption, on buying and spending for one’s own personal use.

With dropshipping, the main question is a matter of who collects the consumption tax from the end customer. Is it you, the retailer, or the dropshipping supplier who delivers the order?

Who collects sales tax, you or the supplier?

Surprise! There’s no clear answer… But we’ll lay out the general scenarios you encounter, when purchasing from a dropshipping supplier and when selling to a customer. We’ll also advise you on how to double-check your particular tax status.

Do you need to pay sales tax to your suppliers?

This is a tricky step. Usually, you do not need to pay sales tax on the orders you make from your suppliers. That’s because there’s a sales tax exemption for purchases intended for resale. BUT to take advantage of this exemption, your business needs an official exemption certificate.

Sales Tax Exemption Certificates

Also referred to as resale certificates. The rules for these certificates vary by state. Some states only accept in-state issued certificates, while others accept multi-state certificates.

When you make your purchase from the supplier, you need to provide them your complete exemption certificate. Then the supplier will not charge you sales tax.

Do you need to charge sales tax from your customers?

This B2C (Business to Consumer) part is a bit more straightforward.

If you have sales tax nexus in a state…

Then you must register for sales there. Then you must collect and remit sales tax in all states where you’re registered. It gets confusing with dropshipping. Some states tax the full retail price of the transaction, and other states only require taxing the wholesale price.

If you don’t have nexus in a state…

That usually means you’re exempt from charging and remitting sales tax. But — there’s always a but! — if the dropshipping supplier who delivers the order is located in the same state as the customer, then you might be on the hook for sales tax.

Some states consider an in-state supplier to qualify as a nexus for that sale. California, New York, Texas, and Florida have particular clauses about this scenario.

Always check each state’s tax policy to make sure you’re staying within the rules. Here’s a list of each state’s revenue department website.

Side note: This doesn’t apply to you as the retailer, but there are special clauses for dropshippers, too. If the supplier has nexus in the state, but you don’t, then they might be responsible for collecting sales tax. These states include California, Connecticut, Florida, Hawaii, and others.

For a full explanation of how to comply with US economic nexus, download our Ultimate Guide to US Economic Nexus.

Ultimate Guide to US Economic Nexus
Everything you need to know to eliminate the confusion & frustration of complying with the US Sales Tax Economic Nexus
Click here to get the free guide

What if you sell in Canada?

If you’re a Canadian company or your company sells in Canada, you will likely have to apply and collect GST instead of Sales Tax. GST stands for “goods and services tax” and it’s typically charged at every stage of production.

Like US sales tax, it’s typically levied as a flat-rate percentage, based on the value of the transaction. 

In general, Canada follows what is called “the place of supply rule” which determines the tax rate you should charge to your customers, withhold, and remit to the appropriate government body. Determining the “place of supply” can differ based on your business location, what you sell, and to whom.

If you are an ecommerce company selling tangible goods (i.e. clothes, electronics, PDFs, etc.), the rule is pretty clear. You need to charge GST across the board if the destination is in Canada. Depending on the destination, you may charge GST only, GST + PST, or HST.

For further information, please head to our Canada Sales Tax Guide.

What if you sell in the European Union?

Now let’s move on the taxes part if you’re selling in the European Union.

Do you need to pay VAT to your suppliers?

If you are an EU VAT-registered business, and your supplier is also in the EU, then VAT on these B2B purchases is managed through the reverse-charge mechanism.

If your business is located outside of the EU, but your supplier is inside the EU, then you probably don’t have to pay VAT.

Do you need to charge VAT from your customers?

If your business is located outside the EU… Then you must register for EU VAT and begin charging tax once you surpass the thresholds.

If you remain below the thresholds and never register for VAT, then you run the risk of unhappy customers. If your goods are being imported from outside the EU, then upon delivery, the customer might end up paying some surprise VAT and import duties. Such unexpected costs make for poor reviews!

For the best customer experience and a consistent sales tax process across all EU member states, follow the rules for distance selling in the EU. Here you’ll also learn everything you need to know about the distance selling thresholds.

For further information about VAT, please head to our EU VAT Tax Guide.

How to Charge Taxes on a Shopify Dropshipping Store?

Screenshot of how to charge tax on a Shopify dropshipping store. This is great if you need help with your accounting.

If you’re using Shopify for your dropshipping store, then this for you! But if not, then don’t worry, most ecommerce platforms have guides on how to charge taxes on their platform.

Do keep in mind that these are guides on how to charge taxes; most of these platforms don’t give any legal advice. For example, this is what Shopify writes in one of their guides:

The following reference guide is for informational purposes only, and is not intended to replace professional tax advice. If you have further questions about whether tax legislation applies to you, then you should contact US state tax authorities or a tax professional.


The thing is, Shopify will collect sales tax for you, but you must configure your store to do so. Thankfully, Shopify has easy steps for enabling all of EU VAT and all of US sales tax, so you can knock out 28 countries and 50 states with one setting.

Here are the instructions for enabling sales tax in the United StatesCanada, and the rest of the world.

And you can read this article here if you’re not sure yet which countries you’re going to target. That article also includes a few countries that are better to be avoided when dropshipping.

It’s a bit tricky and tedious… But if you aren’t using an automated tax plug-in for Shopify, then these little steps are necessary.

If you’re interested in learning more about the taxes on a Shopify store, then I suggest reading our guide here.

One thing that we will cover in that guide is how to add taxes to your product price: Surprising your customer with an extra cost at checkout or adding the tax to the product price.

Do you want a hint on our suggestion? See the image below!

*Disclaimer: At Quaderno, we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.

Resources: Making Your Business Official by Oberlo (Their Dropshipping 101 Ebook)


My name is Richard, and I created Do Dropshipping after I saw so many paid dropshipping courses popping up. The goal of Do Dropshipping is to put these “gurus” out of business by giving everyone access to the information that they need to start their own dropshipping business today. No more paid dropshipping courses!

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