 Taxes, ooh, don't let that term scare you and don't go anywhere. Taxes is one of the things that we have to put up with as business owners and many people are afraid of dipping into the e-commerce scene because they simply have no idea what it means when it comes to paying their taxes and what taxes we have to pay. And that is why in this video, I'm gonna simplify the whole process for you and teach you everything that you need to know about taxes when running an e-commerce business. Now, this may not be the most sexiest topic when starting your e-commerce business, but if you're here for the long run and I really hope that you are, you need to watch this video. Quick intro and let's go. Hello everyone, I'm Liran from AutoDS and in this video, we're gonna talk about our tax obligations when running our e-commerce businesses. Now, reminder, this is not financial advice and I highly advise you to seek a professional in your country where you reside in and get the most accurate information for where you reside. Having said that, do not forget to subscribe to our YouTube channel to always learn about the hottest and most important topics when running an e-commerce business and like and share this video if you appreciate the value. Having said that, let's go ahead and jump right in. Dropshipping taxes, a beginner's guide, everything that I'm going over in this video, you can also read about it in the blog which I'll leave a link to right below this video. And don't forget to comment below and let me know what you guys think about your dropshipping taxes if you're already paying taxes and how that is going for you. Now, let's go ahead and begin. How do taxes work with dropshipping? To start off, it works differently in every country but many countries have similar things that have to do with taxes like paying your income tax which is applicable for pretty much every country except for a few exceptions which I will get to soon. Other taxes that we'll need to pay besides income tax is sales tax, source tax and customs duty. I'm gonna go over all of that and everything that you need to know about it. For starting off, your income tax is a type of tax that your government charges. So it depends on where you live, where you reside, you'll have to pay a certain income tax for every time you make an income. So whether you're running your own online business or even if you have a regular nine to five job, you are bound to pay income tax as long as you are making an income. How much tax you need to pay depends on how much you are making. There are different steps, different levels of taxes that you need to pay and you can see depending on your country where you live what are the percentage steps there and what total percentage of income tax you have to pay from your income. Now if you're working on nine to five, you have someone in the accounting department of that company that's doing that job for you. But if you're running your own business you'll need to have your own accountant or do it yourself which requires a lot of work and understanding. So my tip for you here is pay your accountant from your profits and that also turns it into a business expense so you won't have to pay taxes for whatever you're paying your accountant. So first we've got the income tax and when you're running your own business the income tax is not taken from the total amount of money that your customers paid you but rather from your profits. So there is how much money you made, how much your customers paid you and then how much expenses you had including how much you paid for the products to ship out to your customers, your selling channel subscriptions if there are any and any other business expenses like paying your accountant which I just mentioned a minute ago. So when you take your income and subtract your expenses you'll get your profit that is the difference between them and from that profit you will have to pay an income tax. The second type of tax is the sales tax. Now the sales tax is what you are charging on your selling channel. Now sometimes you have control over your sales tax and sometimes you don't have control over it it depends on what selling channel you're using. For example, if you're dropshipping on Shopify or Wix and other hosting platforms like that and in general what happens here is when you make a sale on your store the customer is charged for tax so there's the selling price whatever price you're selling the product for. For example, you sold a product for $20 but instead of the customer paying you $20 you'll notice that he paid you $22 with an extra $2 tax as an example. Now my obligation as a seller is to collect that $2 tax and pay it to the government from where the customer resides in. So for example, if I open a store on eBay US I will notice that eBay is charging sales tax for every time someone buys something from my store. So let's use the example that I just used. I charge a customer $20 for a product. The customer pays $20 plus an extra $2 tax through eBay. Now eBay wants to send me a payout of $22 minus the selling channel fees but let's put that on the side for now. Now eBay owes me $22 for example. They're going to pay me $20 and then they're gonna deduct that $2 tax and they will take the responsibility of paying the US government those extra $2 sales tax. So you're collecting it from the customer. eBay is holding onto it for you and they'll deduct that tax back and pay it to the local government. Now if you're using other channels like for example Shopify then you can calculate the sales tax on checkout but it really depends on what audience you are targeting. For example, if you're opening a Shopify store and you're targeting a different country like for example Israel and you also live in Israel then in this case every time you sell a product and you collect sales tax on checkout you're gonna need to collect all of this sales tax and pay it to the Israeli government at the end of the month. You're going to do that with your local accountant so it'll make everything much easier but that is basically how sales tax works. Some selling channels will collect it automatically and do the hard work for you while others will require you to do it with your accountant. Then we've got the source tax. This is the third type of tax that we need to be aware of. The source tax is a tax that we are paying our suppliers when purchasing the products from them and shipping it to our end customers. So for example, I just made a sale and I'm using let's say Walmart as my supplier. Now I'm purchasing the product from Walmart and I'm shipping it to the end customer but when I'm purchasing the product from Walmart I noticed that instead of Walmart charging me $30 they actually charge me $33 with an extra $3 tax. So I'm also paying Walmart an extra tax or whatever supplier I'm using it can even be wholesale, private suppliers it really doesn't matter I'm just using them as an example but I'll notice that I'm also paying them a tax. So you need to add that tax on top of your source price and also on top of your break events to be able to calculate your profits accurately. The fourth type of tax that we need to be familiar with is customs duty tax. And this is a tax that we'll need to pay when we are importing and exporting goods in and outside of the country that we are targeting. So for example, I opened a store on Wix and I'm shipping products from United States warehouses to the UK audience which is my target audience. So when I'm exporting goods outside of the US and importing them into the UK then the UK government will expect me to pay customs duty sales tax to the delivery company in the UK. If you wanna learn about all of your UK tax obligations I'm going to leave a link right below this video to our article about drop shipping taxes in the UK. So you'll know all about your UK tax obligations when drop shipping there along with customs duty and tax. But if you're drop shipping to other countries then learn about that country's customs duties and taxes. There's usually also a minimum price for the package. If it's a cheap package you're most likely not gonna have to pay it but if it is an expensive or heavy package there's a high chance that you'll have to pay customs duty taxes and either the seller or the buyer can pay customs duty taxes as long as you add it into your business policies and let the buyers know if they are the ones or if you are the one as the seller to pay the customs duty taxes. Now of course all of the buyers would like to see that sellers are the ones who are going to pay customs duty taxes but that is up to you the seller if you wanna pass that on to the buyer or pay for it yourself and make more sales and increase customer loyalty cause no buyer wants to get surprises when the product reaches their country and then they realize that they need to pay another 10, 20, 30% customs duty it won't make them that happy when they receive their package. So that is the fourth type of sales tax that we need to be familiar with. Here in front of me you can see an example of paying a source tax when purchasing the product from your supplier. So here you can see an order review of this outdoor portable hammock and you can see that the product cost $28.31 but on top of that we have another $2.83 as VAT which is something that you also have to pay when dropshipping in the UK but this is another form of tax and as you can see it is 10% from the source price. So the total here will be $31.14. So that's an example of the source taxes that we have to pay. How much taxes do I have to pay when dropshipping? Now that you're familiar with the terms and what types of taxes you need to pay the next question usually is now let's put all of that aside how many taxes do I have to pay at the end of the day? So as I mentioned there is an income tax and this is a federal income tax. Now there are some countries that do not have to pay it I will get to it in just about a minute but you should know that the average federal income tax ranges between 10 to 37% but some countries go even farther than that like Israel for example can go up to 47 and even 50% income tax when you reach a certain limit. So to know what your income tax rates are and at what limits at what levels you'll have to pay a higher percentage seek your local accountant or check out your government's website and see what the local law is. Then you've got the sales tax which I mentioned which is a tax that you're gonna have to pay your source, your supplier when checking out with their product and shipping it to your buyers and this usually ranges between zero to 11%. Some will not charge you any tax and some can even charge you up to 11%. Then we've got the customs duty tax which I mentioned which ranges between zero to 37% on average. Now, what about tax exempt? How can I avoid paying taxes when drop shipping? Let's take that back one step. Can I even get tax exempt when drop shipping? The answer is yes, but what type of tax? You can't avoid income tax unless you live in a few specific countries which I will get to and you can't get exempt from customs duty but you can't get exempt from paying your source paying your supplier that source tax and how do you do that? Start off by reaching out to your supplier and asking them what type of documentation they need in order for you to file for tax exempt with them. They may even provide you with the needed documents. Then what you need to do is speak with your local accountant or go to your government's website and look for the place where you can get tax exempt when running your e-commerce business. For example, in the United States, it's in the multi-state tax commission who is responsible for giving you the application and evaluation for your tax exempt. Here's what their website looks like and you have a link to it once again in the blog article below this video. So that's regarding tax exempt and once you will get that approval every time you purchase from your supplier you won't have to pay them tax and that will make your business venture a much more profitable one. So I highly recommend you to check out how you can get tax exempt when purchasing products from your suppliers. And now let's talk about income tax. How can you avoid paying income tax when dropshipping or when running an e-commerce business? If you want to avoid paying income tax you can only do that in some specific countries around the world. And those countries are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Now once again, this data may change from time to time and this is not professional financial advice and how to run your taxes. But these are the countries as of today that don't require paying any income tax. You can make as much money as you want from those places. For example, Elon Musk, one of the world's most richest people had to pay the biggest amount of tax last year in 2021. And so this year in 2022, he's thinking about moving the taxes and that way he can avoid paying all of that income tax and use that money to do other things in life. So if you want to get income tax exempt, this is the way to do it. Check out those countries, check out their laws and maybe even consider relocating. So that's a basic overview of what our tax obligations are as the e-commerce store owners, what type of taxes we have to pay and how we get around to paying them while also being able to avoid them. Of course, all in legal ways we are doing everything by the book. My biggest suggestion is once again to speak with a local account who can help you when you're dropshipping to your country or to any other country around the world, it'll make everything much more clear. But when you have all of this basic information, you'll have a strong base to start with. Good luck with your dropshipping businesses. Let me know in the comments below if you have any questions and I will answer them. Head over to our blog page at autodesse.com slash blog to learn about anything and everything about your next step in your e-commerce business. Join our mentorship program if you wanna have a one-on-one mentor that will help you take your dropshipping business off the ground and do not forget to subscribe to our YouTube channel to keep learning about the next step in your e-commerce business. Thank you for watching and good luck with your taxes.