Dropshipping Taxes: Definition, Types, & How to File

Businesses use dropshipping to fulfill customer orders without having to keep products in stock. It’s a great way for retail businesses to save space, time, and money, while offering customers more choice. Dropshipping is rising—the global market value is projected to reach over $1 trillion by 2031. While dropshipping has opened numerous opportunities, it has also created confusion about tax obligations that vary by state and business structure for e-commerce sellers.

Use this blog as your guide to dropshipping taxes, including details on the types, tax obligations, and considerations you need to know to start your own dropshipping business or add this feature to your current operations. As you scale your small business activities online, don't forget about professional accounting support. 1-800Accountant, America's leading virtual accounting firm, is ready to help your dropshipping business grow with affordable, tax-deductible accounting services with year-round support.   

Key Takeaways

• Your dropshipping income is taxable at the federal level.

• Most dropshippers must collect and remit sales tax once they establish nexus in the state or states where they sell.

• Obtaining resale certificates may help you avoid paying sales tax to suppliers.

• You may owe quarterly estimated taxes to the Internal Revenue Service (IRS).

• Working with an e-commerce tax nexus-focused accountant helps prevent costly mistakes throughout the tax year.

What Is Dropshipping?

The dropshipping model involves two transactions: one between the dropshipping owner and the customer, and another between the supplier and the customer. There are three steps to the dropshipping process: 

1. The dropshipping owner receives a customer’s order.

2. The dropshipper purchases the items for the order from a third-party supplier.

3. The third-party supplier ships the products to the dropshipper’s customer.

Note that dropshipping is considered operating a retail business for tax purposes.

Do You Have To Pay Taxes on Dropshipping?

So, do you pay taxes on dropshipping sales? 

A direct tax on your earnings is known as an income tax, while an indirect tax based on consumption is known as a sales tax. Depending on your activities, you’ll pay taxes on dropshipping based on your sales tax or income tax, which is known as a nexus. As a result of the Wayfair decision in 2018, a sales tax nexus occurs once your business reaches a certain revenue or transaction threshold in a state – typically $100,000+ in sales or 200 or more transactions.  

A business has a nexus for dropshipping income tax when it:

• Derives income from sources within the state.

• Has capital assets or property within a state.

• Have employees there engaging in work. 

• Leases or owns property there.

Businesses may have a dropshipping sales tax nexus in their state of operation because it has:

• A physical location in the state. 

• Employees who regularly solicit business there, such as salespeople. 

• Property, including intangible property, within the state. 

• Residents working in the state. 

There are many platforms available to help streamline your dropshipping business. Some of the most popular dropshipping platforms you can use for your dropshipping business are:

• Amazon

• Etsy

• Inventory Source 

• Magento

• Shopify

• Squarespace

• Weebly

• WooCommerce

What Taxes Do You Need to Pay for Dropshipping?

Dropshipping businesses are unique because both tax nexus types can trigger dropshipping owners to pay taxes. As a result, you’ll pay two main taxes for dropshipping: income tax and sales tax. But there are other taxes to learn about, which we will detail below. 

Income Tax

Income tax is what you’ll pay the government for your dropshipping profit. If your business operates as a pass-through entity, such as a sole proprietor or an LLC, income is passed through to each owner and reported on their personal tax returns. 

All dropshipping business owners will pay federal income tax to the IRS, and almost every state charges income tax, which you’ll also pay. You can pay the federal tax quarterly as estimated income taxes if you expect to have a tax liability of $1,000+ during the year. Quarterly estimated tax deadlines for 2026: 

• April 15

• June 15

• September 15

• January 15, 2027

Dropshippers pay income tax when there’s a profit, and don't pay tax on revenue.

We offer personal income tax preparation and filing services that save time and ensure compliance with dropship requirements. Schedule a free consultation today to learn more. 

Sales Tax

Sales tax is a city, municipal, or state tax that is a percentage of the sale price. Your business will collect tax at the point of sale and remit it to the relevant tax authorities. The complexity of this task increases for multistate operations.

If you plan on reselling goods for your business, you may qualify for a resale exemption certificate. You can qualify for an exemption certificate in three steps:

1. The purchaser completes an exemption certificate and provides it to the seller.

2. The seller will retain the sales tax exemption certificate and may sell the goods to the purchaser.

3. These goods will not have sales tax charged.

Supplier or “Source” Tax

Source tax is charged by suppliers that your dropshipping business uses to fulfill customer orders.

The actual amount your dropshipping business will pay depends on several factors, including:

• Product category

• Supplier's physical presence

Some dropshipping businesses can qualify for an exemption from this tax, such as those that sell manufacturing equipment. If approved, your business would not be required to pay a source tax to your supplier. 

Customs and Import Duties

If your suppliers import the goods your dropshipping business sells from outside the country, you will be responsible for duty taxes or customs taxes on those items. Items under $800 were previously exempt under the De Minimis rule, which was phased out during the 2025 tax season.

This tax applies to most businesses that import goods into the United States. 

How To File Taxes for Dropshipping

Learn how to file dropshipping taxes by following these four broad steps:

1. Track business income and expenses throughout the tax year.

2. Determine your business's nexus and sales tax obligations.

3. File federal and state income taxes by the appropriate deadlines.

4. File sales tax returns where required.

While state tax forms will vary, common federal forms you may need include: 

• Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)

• IRS Form 1040, U.S. Individual Income Tax Return

Note that you're obligated to pay income taxes no matter where your dropshipping business is based.

• You’ll pay federal income taxes based on your dropshipping profits. 

• You may also pay state income tax, though not every state requires it.

• Depending on where you live, you may have to file both federal income tax and state sales tax. 

Whether you’re filing federal or state income taxes, you can qualify for tax deductions, which can help when tax time arrives. Professional support will help you identify eligible deductions while reducing audit risk. 

Work With an Accountant That Specializes in Dropshipping Taxes

Launching your dropshipping business is an exciting milestone, but getting the details right can be nerve-racking. This is why many small business owners and dropshipping entrepreneurs trust the tax professionals at 1-800Accountant, who are experienced in e-commerce, sales tax, and multistate tax matters, to address their needs.

Schedule a free 30-minute consultation today to learn more about tax preparation, bookkeeping, year-round support, and proactive planning for your dropship operations for an affordable, tax-deductible fee.

FAQs about Dropshipping Taxes

Do I need a tax ID for dropshipping?

A tax ID is a requirement for dropshipping business owners to pay sales tax. Most states feature a state sales tax, and you’ll need a tax ID to prove that you collect sales tax from a customer’s purchase.

Do I need an LLC to start dropshipping?

No, you don't need an LLC to start dropshipping, but forming as one is optimal due to the protection this entity type provides. Creating an LLC before you start dropshipping will protect your business and personal assets.

Forming LLCs also offers important benefits for dropshipping businesses, which include:

• Keeping your business assets and personal assets separate.

• Protecting your personal assets if your dropshipping business has liability issues.

• It provides your business credibility with consumers when applying for grants and loans.

Form your LLC the right way with 1-800Accountant's entity formation service. 

What permits do dropshipping businesses need?

You're required to obtain a seller's permit to operate your dropshipping business in most states. This permit lets you collect sales tax and sell products online. U.S. states that don't typically require a seller's permit due to a lack of statewide sales tax include:

• Alaska

• Delaware

• Montana

• New Hampshire

• Oregon

When do dropshippers pay quarterly taxes?

All dropshipping businesses will pay federal income tax. Your business will also pay state income taxes if it operates in a state where that income is taxed. You can pay the federal tax quarterly as estimated income tax payments. 2026 deadlines include: 

• April 15

• June 15

• September 15

• January 15, 2027

Making the right quarterly estimated tax calculations and submitting them on time is easy with 1-800Accountant's full-service quarterly estimated tax solution for your dropshipping business. 

What tax deductions can dropshipping businesses take?

Tax deductions reduce your dropshipping business's taxable income. There are numerous tax deductions your dropshipping business can take advantage of, including deductions associated with:

• Advertising and marketing

• Travel and transportation

• Professional fees (such as virtual accounting).

Do Shopify or Amazon collect sales tax for me?

Amazon and Shopify can both collect sales tax for your dropshipping store. Amazon typically collects and remits sales tax automatically, while Shopify sales tax collection requires more effort. You can automate collection and remittance on Shopify via Shopify Tax. We recommend monitoring collections and remittance on all platforms you sell on.