VAT on Drop-Shipping:
EU VAT duties for Distance Selling

Drop-shipping is a retail fulfilment method that allows online sellers to sell goods to customers without storing or actually owning the product. As soon as a customer buys a product online, the drop shipper places an order at a third-party supplier and then the journey of the product starts.

Drop-shipping makes online selling and setting up an online business quite easy. When an order comes in, the process could be to directly contact the manufacturer who then starts with the production and provides it to the shipping partner who then takes care of the fulfillment.

This strategy makes selling online with rather small financial efforts possible. However, the fiscal and tax-related aspects should not be overseen.

VAT Duties for Drop-Shipping

For drop-shipping businesses it is essential to determine where the place of supply of the goods is to determine whether VAT has to be charged or not.

When shipping from China (so outside the EU) to France (into the EU), the place of supply is where the goods are shipped from, so China.

With China not being part of the EU, no VAT will be charged. At least not until the annual threshold limit of the country of import is reached.

VAT Registrations

When storing goods in a country, setting up a company or selling online and reaching the annual threshold limit via distance selling, vat registrations become mandatory. That also includes follow-up work like VAT returns, filings and reports.

The distance selling thresholds are different in each Member State and once having reached the country-specific annual threshold, you need to get a VAT number in the country of import.

So reaching this limit is something all drop-shipping businesses have to consider when selling to customers in Europa.

Reaching the annual VAT registration threshold for distance selling always makes having a VAT number mandatory and it is important to act in time to avoid penalties, fines and other bad consequences. Here you can find all values of all VAT thresholds in Europe.

Intrastat

Intrastat reports are used to record the movement of goods between the Member States of the European Union and are required when the Intrastat threshold is exceeded. Businesses must declare shipments and arrivals and the submission of these declarations is mandatory in all EU Member States.

The reporting has to happen on a monthly basis when having a European VAT number. The goal is to allows governments in the EU to track the sales between countries, to collect information for statistical purposes and therefore to fight VAT fraud.

Import VAT

Even though “normal” VAT payments might not be required when a product is imported from outside the EU to an EU member state and the threshold limit isn’t reached, import VAT is most likely to be due instead.

Note: For being subject to import VAT, the imported value has to exceed a threshold of between 10 € and 22 €, depending on the country.

Import duties/VAT payable by the importer of record (IOR)

If you are dropshipping and your customer is the importer of record, technically the customer is responsible for the import VAT. If your business is the importer of record, then your business will be liable to pay the import costs and VAT.

Importer of Record: Customs term for the entity responsible for (1) ensuring the imported goods comply with local laws and regulations, (2) filing a completed duty entry and associated documents and (3) paying the assessed import duties and other taxes on those goods. (Source: businessdictionary.com)

It is theoretically possible to include the import VAT in the purchasing price, de facto this is rarely the case and the customers needs to pay it. In most cases, the customers has to pay it to the postal company or directly to the customs.

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Advantages of Drop-Shipping

So much about the tax and VAT side, here you find an overview on other advantages and disadvantages that drop-shipping businesses should be aware of (and some small tips on how to make the best out of it.)

Little financial efforts

Not having to invest in inventory makes the financial burden to start a drop-shipping business comparatively really low as there are no costs for storing. Further, you only buy and then sell products that are sold – no risk at all. This also means that you have already been paid by the customer.

Easy to set up

It’s obvious that with not having to deal with physical products and needing space for storing, the overall workload decreases drastically and preparatory work and other steps, like pre-ordering or storing, are no longer relevant.

Anywhere possible

As you don’t need to deal with any physical aspects of the business, you can sell anywhere from anywhere to anywhere.

Higher Flexibility

Not having to get products in advance does not only avoid storing costs, it also encourages quick changes in the product catalogue. This allows to quickly add booming products for example and to react to current trends.

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Downsides of the Drop-Shipping model

Low margins

Low margins are something many businesses in the dropshipping sector have to struggle with. As this business model is so easy to set up, and the overhead costs are so low, it is often calculated with very small prices and margins.

Note: In this case, make at least sure to have a better online presence and a more reliable brand then to competition to 1. outrank them and to 2. make a reasonable pricing acceptable for potential customers.

Issues with supplier

If your suppliers has difficulties in delivery and doesn’t receive the parcel or receives it to late, the dropshipper is still responsible and the party to blame.

Note: Make sure to have reliable partner and a working network to avoid any difficulties. Customer satisfaction and good reviews are of the utmost importance

Limited possibilities for brand-building

Drop-Shipping does not provide a wide reservoir of customization and branding possibilities. The packaging is done be a business partner, the manufacturing as well. That makes binding clients to your brand way more difficult.

Note: The limited opportunities here are the reason why, as already mentioned before, it’s crucial to have a good online performance and a convincing reputation to compensate these disadvantages as much as possible

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Besides this small overview, it has turned out that the biggest challenge for most drop-shippers are the follow-up and administrative tasks that are associated with VAT and taxation.

Summary: VAT for Drop-Shipping

Drop-shipping can be a great way for businesses to reach millions of customers without spending a lot of money and with a comparatively low risk. This is connected with some downsides, like fewer ways to build a strong brand name, but depending on the niche and sector, the easy setup can already be worth it. The high flexibility is what many drop-shippers like most about it.

As mentioned before, taxation, customs and those financial aspects often causes headaches. Not staying compliant will lead to fines and even some online marketplaces will exclude sellers without proper VAT registrations and valid VAT IDs.

Our Europe-wide team of tax experts and accountants together with our VAT software are what makes hellotax a reliable partner for keeping track on tax duties and to get assistance for all VAT-related tasks and obligations. Always with the the objective to reduce the workload of online sellers and ensure tax compliance at any time.