Dropshipping is a business model in e-commerce that allows for selling products online without the need to handle the storage and delivery. In this sales / logistics model products are shipped directly from a supplier (manufacturer, wholesaler) to an individual customer, with an online shop owner acting as an intermediary in this transaction (advertising products, processing orders etc.).
There are two types of dropshipping:
1) Selling products under your own name
The online shop owner purchases products from a supplier and sells them under his own name. In this model the entrepreneur settles taxes both on the purchase and sales of products.
2) Providing intermediary services for a supplier
The online shop owner doesn't purchase or sell products under his own name but instead provides intermediary services for a supplier. In this model the entrepreneur settles taxes on intermediary services.
Model 1: Selling products
The VAT taxation of online sales mainly depends on the status of a buyer (consumer / business entity) and the country the products are being shipped to. In this article we will address the selected tax issues related to online sales to consumers (private individuals).
Online sales to Polish customers are subject to VAT under general rules. This means that the online shop owner (“Seller”) may be exempt from VAT if their annual sales does not exceed 200,000 EUR and if the products being sold are not listed as excluded from VAT exemption (e.g. electronics, cosmetics).
As regards online sales to customers from other EU countries, there is a sales value threshold of 10,000 EUR per year that must be taken into account when determining tax obligations. Until this threshold is exceeded, the Seller taxes EU sales in the same way as domestic sales. Once the threshold is exceeded, the Seller is obliged to tax the sales with the VAT rate applicable in the buyer's country.
In order to simplify the settlement of VAT tax on EU sales, the Seller has an option to register for VAT OSS (One-Stop Shop). This procedure allows the Seller to pay foreign EU VAT and submit settlement declarations to the Polish tax office. Applying this procedure is a significant convenience for the Seller, as otherwise, they would have to fulfill registration, accounting, and reporting obligations in each EU country to which the goods are shipped.
Another issue that is important tax-wise is where the products are shipped from. Purchasing goods from outside the EU (e.g., China, the US) constitutes import of goods and requires the payment of VAT on import and customs duties (with some exemptions).
Generally, VAT on import is settled as a part of customs clearance (in practice the payment of VAT tax and customs duties is often handled by professional customs agencies or courier companies). In certain cases it is also possible to settle VAT on import under simplified rules within VAT IOSS (Import One Stop Shop). This procedure can be applied to shipments from outside the EU to customers in EU with a parcel value not exceeding 150 euros (with some exceptions). If the Seller is registered for VAT IOSS procedure the VAT tax on import is charged from a buyer at the time of purchase at the VAT rate applicable in the buyer's country. Also the online marketplace platforms (e.g. amazon) can register for VAT IOSS – if the Seller makes sales on such platforms, it is the platform then that collects and settles VAT on import.
As regards the taxation with income taxes, in the discussed dropshipping model the sales income occurs and not the commission income - this difference is especially important when a business owner operates as ‘sole proprietorship’ taxed with the lump-sum tax. The amount received from the buyer constitute revenue and expenses related to the purchase of goods for further resale can be recognized as tax-deductible costs.
Model 2: Intermediary services
In the dropshipping model that consists in intermediary services, the Seller settles taxes on the commission received from the supplier (manufacturer, wholesaler). It means that in this case the Seller issues invoices not to the buyers of the products but to the supplier / owner of the products, and it is the supplier who issues an invoice directly to the buyer.
Intermediary services are subject to a regular 23% VAT rate. If the Seller provides intermediary services to a foreign supplier who meets the definition of a VAT taxpayer, then these services are subject to VAT in the supplier’s country under the 'reverse charge' mechanism. In such a case the supplier is responsible for settling the VAT on intermediary services as the service recipient.
In this model the Seller does not have to handle customs clearance formalities related to import as he does not purchase the products to resale them.
As for the issue of income tax, in this model it is the commission that is subject to taxation, and not the income from sales of goods.