Drop-shipping tax rules
Drop-shipping creates a distinctive tax problem: the seller and the goods cross different borders at different times. Understanding who owes duty, VAT, and sales tax — and in which jurisdiction — is essential before operating a drop-ship model internationally.
What drop-shipping is
In a drop-shipping arrangement, the seller accepts an order from a customer but never takes physical possession of the goods. Instead, the seller purchases the product from a supplier (often overseas) and instructs the supplier to ship directly to the end customer. The seller earns the margin between the customer price and the supplier cost.
From a customs perspective, goods are imported into the customer's country. From a tax perspective, the seller may have obligations in the customer's country, their own country, and potentially the supplier's country — all simultaneously.
The importer of record problem
Every international shipment requires an importer of record (IOR) — the legal entity responsible for the goods at the border, liable for duties and taxes, and named on the customs declaration. In a drop-ship transaction, this is ambiguous:
If the supplier ships in their own name
The supplier may be treated as the exporter; the customer becomes the importer of record and is liable for duty and VAT. The customer may not have agreed to this.
If the seller's name appears on the shipment
The seller may be the importer of record, creating customs obligations in a country where the seller has no physical presence and may not be registered.
Mismatched invoice values
If the customs value on the supplier's shipment differs from the price the customer paid, this can trigger under-declaration scrutiny.
United States
The US has no federal sales tax. Sales tax is levied at the state level, and obligations are determined by nexus — the connection between the seller and a state.
Economic nexus
Following the Supreme Court ruling in South Dakota v. Wayfair (2018), most states have adopted economic nexus thresholds — typically USD 100,000 in sales or 200 transactions in a state per year. Once exceeded, the seller must register and collect state sales tax.
Marketplace facilitator laws
In all 50 states with a sales tax, if a drop-shipper sells through a marketplace (Amazon, eBay, Etsy), the marketplace is typically required to collect and remit sales tax on behalf of the seller. This removes the sales tax obligation from the individual seller for those channels.
Import duties on drop-shipped goods
Goods shipped directly to a US customer from overseas are subject to the same import rules as any other import. If the shipment value is USD 800 or less, Section 321 de minimis may apply (subject to country-of-origin restrictions). Above that, formal entry and duty payment are required.
United Kingdom
The UK operates a split VAT treatment for imports based on consignment value:
| Consignment Value | VAT Treatment | Who Collects VAT |
|---|---|---|
| GBP 0 – 135 | VAT collected at point of sale | Seller (or marketplace) |
| Above GBP 135 | VAT collected at import | Buyer (or customs agent) |
For goods under GBP 135, overseas sellers are required to register for UK VAT and charge it at the point of sale at the standard rate (currently 20%). UK VAT number must appear on the customs declaration. Goods above GBP 135 are subject to import VAT assessed by HMRC at the border — the buyer pays this, often as a surprise charge on delivery.
European Union
The EU introduced the Import One-Stop Shop (IOSS) in July 2021 to simplify VAT collection on low-value imports:
Goods valued at EUR 150 or below (IOSS)
The seller must register for IOSS and charge the VAT rate of the destination EU member state at checkout. Goods declared under IOSS are released at the border without further VAT assessment. This requires the seller to file a single monthly IOSS VAT return covering all EU sales.
Goods valued above EUR 150
Standard import VAT applies at the border. The buyer is technically liable, but in practice carriers often collect it on delivery (Delivery Duty Paid arrangements). The EUR 22 de minimis VAT exemption was abolished in July 2021 — there is now no threshold below which EU import VAT is waived.
Marketplace obligations
Where goods are sold through an electronic interface (Amazon, eBay, etc.), the marketplace is deemed the supplier for VAT purposes for goods under EUR 150 shipped from outside the EU. The marketplace registers for IOSS and accounts for VAT, removing the obligation from the individual seller.
Australia
Australia extended its GST (Goods and Services Tax, currently 10%) to low-value imported goods from 1 July 2018. Overseas sellers with annual turnover of AUD 75,000 or more globally must register for Australian GST and charge it on goods valued under AUD 1,000 shipped to Australian customers.
Goods valued at AUD 1,000 or above continue to attract GST at the border as part of formal customs entry. For drop-shippers using Australian suppliers or shipping into Australia from overseas, the registration threshold and the AUD 1,000 split point are the key thresholds to track.
Canada
Canada does not have a specific low-value imports GST/HST collection regime equivalent to the UK, EU, or Australian models. GST/HST on imported goods is generally collected at the border as part of the customs entry process, regardless of value.
Canada's duty de minimis threshold is CAD 40 for courier shipments (CAD 20 for postal). Goods valued above this threshold are subject to duty and GST/HST assessment. Drop-shippers should assume that most commercial shipments will attract GST/HST at the border, and that the customer will receive a collect charge from the carrier.
Common mistakes
Not registering for VAT/GST in destination countries where registration thresholds have been met.
Assuming that the de minimis threshold exempts goods from VAT as well as duty — in many countries (EU, UK, Australia) VAT now applies to all imports regardless of value.
Intentionally understating shipment values to stay below thresholds. This is customs fraud and can result in seizure of goods and penalties.
Not accounting for the supplier's declared value on the customs entry differing from the retail price the customer paid — which can trigger customs queries.
Failing to nominate an importer of record clearly, leaving the customer unexpectedly liable for duties and VAT on delivery.
Using a single IOSS registration for goods above EUR 150 — IOSS only covers consignments at or below the EUR 150 threshold.
Tax thresholds and VAT collection rules change frequently. The EU IOSS threshold, UK split at GBP 135, and Australian AUD 1,000 split are all subject to future revision. Verify current rules with the relevant tax authority or a qualified tax adviser before launching or expanding a drop-shipping operation.