How to Handle Taxes and Vat with an International Print-on-Demand Business
Starting a POD business opens up great opportunities for generating profits but entails many difficulties. Most of them are related to paying taxes. For a startup owner who hasn't previously worked in the industry, the need to manage taxes seems like a real challenge. Especially if the trade is international and implies cooperation with a dropshipper. Let's talk about the POD taxes for US and European sales.
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Sales Tax for the US
For a startup owner, print-on-demand sales tax is the easiest to understand. Its name speaks for itself: it is a tax that is paid for every successful sale. This taxation practice has been used for decades, but the spread of online commerce in recent years has significantly impacted the situation. A business that sells products online in different regions and countries must be ready to overcome some barriers.
If the trade takes place in the United States, the business collects tax only in "closely connected" states. It means that it pays the sales tax nexus. It is based on such terms as "physical presence" and "Economic connection", rooted in the past. For example, the world remembers the case of National Bellas Hess: the court exempted the company from the obligation to collect tax in the state of Illinois, where it distributed goods by mail and couriers. The argument was that it had no physical "points of contact" with the state.
However, in 2018, this decision was canceled (in the South Dakota v. Wayfair case). Now the tax applies to every business entity connected with a particular state. New tax laws equalize the business environment for both physical and online merchants. Of course, it became an obstacle for e-commerce entities, which had to learn new tax rules. Let’s consider the criteria a company must meet to start collecting tax from its customers.
Print on demand business owners are required to collect sales tax nexus if they:
- Are in the state: work in the state and run the business directly from there. Retail outlets, offices, including a home, or even a garage, indicate a physical presence. Temporary business conduct (fair, exhibition) also matters.
- Interact with other entities: cooperates with partners, contractors, including remote ones. For example, ordering consultations on the maintenance of social networks. In some cases, indirect services play a role in forming linkages.
- Have warehouses: keep a majority of inventory with a POD service provider located in the state. It is necessary to be careful: if dropshipping (direct delivery) from the provider is practiced, there may be no connection to sales taxes.
- Sell a lot: sales equal to or greater than the amount or number of transactions on bank accounts established at the state level. It means an economic presence. In practice, everything is more complicated because each state has different conditions.
The tax is collected in all states where the connection is established. To get started, the seller must register and obtain a Sales Tax Permit. Otherwise, the collection will be considered illegal. Tax management boils down to the fact that the business collects payment from the buyer at the last stage of the purchase and transfers it to the state government (then the tax goes to the development of healthcare, education, and other industries). Rates vary by state and change frequently, so it is better to check them in the tax office or study local tax laws.
If the business has no connection with the state, it is exempt from tax. But dropshipping is more complicated. If the direct supplier is located in the same state as the buyer, some states may consider it a nexus. Therefore, you should study in detail the provisions for both retailers and dropshippers if the business is oriented towards cooperation with them. Sometimes the supplier is responsible for collecting taxes in the connected state, but the seller is not.
VAT for EU / UK
Europe and the UK have different game rules. The tax here is called VAT or Value Added Tax (in some countries GST: goods and services tax). It is practically the same as the previous one. The difference is that it is added to the product's cost at each production and delivery stage. It enters the budget by the method of partial payments. As a rule, for businesses in the print-on-demand area, VAT is charged in three stages: fulfillment, sale of a product, and delivery.
When does an entrepreneur with self-employment who offers print-on-demand goods in the UK or EU have to pay this tax? First of all, when the business has a billing address within these countries. In addition, VAT may be charged if the goods are sent from an international to a European address. There are many nuances, including individual ones, and therefore we recommend you consult with a tax specialist.
Also, you have to pay VAT on direct shipments in the UK. It depends on the value of the goods that go on sale. Due to the high rates, many sellers raise the prices of goods to offset costs. The rules for paying VAT have changed after the country left the EU. An income threshold was set: an individual is not required to pay tax if the turnover per year is less than £ 85,000. Higher earnings require registration as a UK VAT payer.
To manage the sales tax for direct delivery, it is critical to:
- examine in detail the rules for paying taxes on print-on-demand and opening accounts in the country or region where the products are sold;
- trace the connection with the states in the United States, but remember that tax liabilities may be strikingly different;
- take care of the resale certificate if you plan to cooperate with print-on-demand platforms like Printful;
- read the rules of various dropshipping print-on-demand companies on the collection and calculation of taxes (Printif, Printful, etc.);
- consult with a specialist of the e-commerce platform having the store and connected POD services (Shopify, Woocommerce) and learn how to configure taxes.
- keep track of tax payment dates and regularly monitor for changes in tax laws.
Despite many nuances in paying taxes, the print-on-demand merchandize business remains one of the most profitable, especially in terms of cooperation with dropshippers. It saves the seller from the problems of managing goods and consumer taxes. Carefully read the rules: the state, the POD service provider, and the e-commerce platform.