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.
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.
