How E-Commerce & Dropshipping Profits Are Taxed in the USA

1Which taxes do I need to consider?

If your e-commerce or dropshipping business sells in the USA, these are the taxes to keep in mind:

1. Tax on profits
2. Sales tax

The key point: these are two completely different taxes. Income tax and corporate tax apply to the profits you generate, while sales tax applies to your sales. Sales tax rules differ from state to state. Most states set a revenue threshold or a number of transactions or sales above which you must register your business for this tax. We have summarized each state's nexus laws for you on this page.

So this page is not about sales tax, but about how your profits are taxed through income tax or corporate tax.

2Where are my profits taxed?

Selling to US customers through your e-commerce or dropshipping company does not automatically mean your profits are subject to US income tax. That depends on several factors, for example whether you sell through a US company or a foreign one.

Foreign companies are generally not taxable in the US, but there is still no one-size-fits-all answer. Various things can trigger a tax liability even for non-US companies, which is why it is always important to look closely at each individual case. US companies need to consider taxes at both the federal level and the level of their home state.

3Not all nexus is the same

It is essential to understand the difference between sales tax nexus and income tax nexus. If your dropshipping or e-commerce company creates sales tax nexus in the US, that does not mean it also has income tax nexus. For that, the rules of the individual states and the double tax treaties apply.

4Taxing profits with a US company

For a dropshipping or e-commerce business, we usually recommend forming a company in the USA. That way you ring-fence the risk and are on the safe side with product liability claims and the like, and you also benefit from a higher company value and a better standing with investors if you ever sell. A US company also looks more trustworthy to American customers, and it is the natural choice if you plan to move to the States yourself.

With a US company, taxation depends first and foremost on the legal form. We recommend the American C Corporation. As a corporation, it pays US corporate tax, which is 21% at the federal level. State rates vary widely. If you form your US dropshipping or e-commerce company in Wyoming, Texas or Washington, for example, there is no state corporate tax; in Texas, however, you need to keep the franchise tax in mind, which applies from annual revenue of $2,650,000. You then have two options for taking profits out:

Profits paid as salary: As a registered officer, you can pay yourself a salary. In the US, no income tax, social security contributions or other deductions are due on it. You do need to consider how your country of residence treats it for tax purposes. If you live in a non-dom country or a country with similar tax laws, you can receive the salary tax-free.

Dividends: A dividend distribution usually triggers US withholding tax. Depending on whether your country of residence has a tax treaty with the US, it is 30% or 15%. On top of that, there is normally capital gains tax in your country of residence.

5Taxing profits with a foreign company

If you sell in the USA through a foreign dropshipping or e-commerce company, the question of how profits are taxed gets a little more complicated. Although non-US companies are generally not taxable in the US, each case always has to be assessed on its own. Numerous factors can trigger a US tax liability.

If you already have a well-established business in Europe and want to expand into the USA with it, there are several points to consider. As a rule, companies without nexus in the US are not taxable there. Simply selling to US customers does not mean your profits are taxed in the USA.

Questions for assessing a potential US tax liability:

• Goods: Is there a warehouse or production site in the USA from which orders are shipped to US customers, or is shipping handled entirely by third parties (as is usual with dropshipping)?
• Office: Do you have a permanent establishment on the ground, such as office space or similar?
• Staff: Does your dropshipping or e-commerce business employ a customer service representative in the US?

The point is to establish whether the income really comes from US business connected to the States. US sources, meaning payments from US customers, are not enough on their own; the activity itself must also be connected to the USA.

If your company has no warehouse, no branch and no employees in the US, chances are good that your profits will not be taxed there. Without a permanent establishment in the USA, your business also has no nexus; our sister firm zerotax.llc specializes in these no-PE structures with a US LLC. In that case, foreign companies can file Form 1120-F, officially stating that they have no permanent establishment in the US and that their profits therefore do not trigger US tax liability. Depending on your company's home country, though, you should definitely check the double tax treaty and evaluate the details of your individual situation carefully in advance.

So if you run your dropshipping or e-commerce business through a foreign company that is not taxable in the USA, it does not need to register for tax there or file a tax return. The foreign company's profits are then taxed in the country where it is based. Regardless of that, you of course still have to remit sales tax depending on the US state.

6What this means for your dropshipping & e-commerce profits

When it comes to the profits of your dropshipping or e-commerce company, essentially all you need to consider is income tax or any corporate tax. Depending on where your company is based and whether it has a presence or permanent establishment in the US, the profits may not be taxed in the USA at all, only in the foreign company's home country.

Beyond tax on profits, you definitely need to keep any sales tax and the nexus rules of the individual US states in mind. Registering for sales tax is no problem for foreign companies, either.

For dropshipping or e-commerce in the USA, we usually recommend forming an American company rather than using a foreign one, unless there are good reasons not to. A US company gives you better liability protection, ring-fences the risk and makes the business more attractive and valuable to investors. Even though the profits are then taxed in the US, you have various tax-efficient ways to take them out. If you have more questions, we will be happy to advise you.

Read more about dropshipping in the EU here. Our E-Commerce & Dropshipping page gives you the full overview, and our article Dropshipping in the USA explains why the US is such a great fit for dropshippers.

In short

• When you sell into the USA, two different taxes apply: tax on profits through income or corporate tax, and sales tax on your sales.
• Sales tax nexus does not automatically mean income tax nexus; that depends on state rules and double tax treaties.
• A US C Corporation pays 21% federal corporate tax; Wyoming, Texas and Washington have no state corporate tax, but Texas has the franchise tax.
• A foreign company with no warehouse, office or staff in the USA usually pays tax on its profits only in its home country.
• For e-commerce and dropshipping, the article generally recommends a US company for liability protection and company value.

How we help you

• Tax structureA clean structure between parent company and US subsidiary, or between you and your US company, coordinated with your accountant.
• Form a CorporationThe US corporation (Inc) for growth, investors and your visa.
• Corporation tax returnForm 1120 and Form 5472 for your US corporation.
• Sales taxRegistration and returns in the states where you have nexus.
• Withholding taxW-8 forms, withholding and treaty benefits, done right.
• US Tax ConsultationYour US tax question, answered by people who know both sides.