What Is Dropshipping and How Does It Work? A 2026 Guide

In short: What is dropshipping? It is an ecommerce business model where a third-party supplier ships products directly to your customer. You run the online store, set prices and handle marketing, but never stock the goods. It needs little upfront money, but margins are thin and you still owe VAT or sales tax.

Updated October 2026: We added an at-a-glance table, a section on dropshipping business models, a worked profit example and more detail on order fulfillment, alongside our tax section on EU OSS and IOSS, the EU's €3 duty, the UK £135 rule and US sales tax.

What is dropshipping?

Dropshipping is a way of selling online without holding any stock. When a customer buys from your store, you pass the order to a supplier. The supplier then ships the products directly to the customer.

You never touch the goods. You don't rent a warehouse, pack boxes or invest in inventory up front. Instead, you pay the supplier only after you have made a sale.

For the customer, the experience is the same as any online order. They pay on your website and wait for the parcel. The only difference is that it comes from the supplier, not from you.

What is a dropshipper (or drop shipper)?

A dropshipper is the retailer in a dropshipping deal: the business that sells the product but doesn't stock it. A drop shipper builds the store, picks the products, sets the price and deals with customers.

The term can be confusing, because the supplier that ships the goods is sometimes also called a "drop shipper". In this guide, "dropshipper" means the online seller. "Supplier" means the wholesaler or manufacturer that holds the stock.

A dropshipper's main jobs are:

• Choosing products: finding items people want from a wide range of products in supplier catalogs.
• Running the store: listings, photos, pricing and checkout.
• Marketing: ads, social media, email and search.
• Customer service: answering questions and handling complaints, refunds and returns.
• Tax compliance: charging and paying the right VAT or sales tax on each sale.

How does dropshipping work, step by step?

Dropshipping works in three main moves: the customer orders from the retailer, the retailer buys from the supplier, and the supplier ships to the customer. In more detail:

1. The customer places an order and pays the retail price on your ecommerce website or marketplace listing.
2. You forward the order to your supplier. Most dropshipping apps do this automatically.
3. You pay the supplier the wholesale price, plus any shipping or handling fee.
4. The supplier packs and ships the products directly to the customer, often in unbranded packaging.
5. You share tracking details with the customer and deal with any questions.
6. You keep the margin: the gap between the retail price and what you paid the supplier, minus fees, ads and tax.

So the retailer markets, sells and supports the products but stays a middleman. The retailer does, however, control the selling price and the final margin.

Who handles order fulfillment?

The supplier handles order fulfillment: picking, packing and shipping each item. Your job is to keep the fulfillment process running smoothly:

• Sync stock levels so you don't sell items the supplier has run out of.
• Pass on tracking numbers as soon as the supplier ships.
• Set clear delivery estimates based on where the supplier ships from.
• Handle problems fast: late, damaged or wrong items are your customer-service issue, not the supplier's.

How do you start dropshipping?

To start dropshipping, pick a niche, find a reliable supplier, set up a store and sort out your tax registrations before you sell. Here is a simple plan:

1. Pick a niche. Look for products with steady demand, decent margins and low return rates. Avoid fragile, heavy or regulated goods at first.
2. Find a supplier. Picking the wrong one can lead to errors or delays that damage a new business. Compare stock levels, shipping times, return policies and where the warehouse is.
3. Order samples. Test product quality and delivery speed yourself before you list anything.
4. Build your store. An ecommerce platform like Shopify lets you launch a store quickly and connect supplier apps.
5. Set up your business and tax. Register your business, then check where you need a VAT number or sales tax permit (see the tax section below).
6. Write clear policies. Publish shipping times, returns and refund rules that match your supplier's terms.
7. Launch and market. Start with a small ad budget, track what sells and cut what doesn't.

Many sellers work with large, tried-and-tested suppliers like dropshippingXL, BigBuy, Spocket and SaleHoo. For a longer list, see our guide to the best dropshipping suppliers.

What dropshipping business models are there?

Most dropshipping business models differ in what you sell and where you sell it. The main ones are:

Marketplace rules matter. eBay, for example, only allows dropshipping if you have an agreement with a wholesale supplier. Buying an item from another retailer or marketplace and having it shipped to your buyer is not allowed. See our guide on how to sell on eBay.

What are the pros and cons of dropshipping?

The main pros of dropshipping are low startup costs and low risk. The main cons are thin margins, heavy competition and little control over quality and delivery.

Dropshipping pros in detail

Minimal startup investment. You can start as a dropshipper with a computer and an internet connection. You will still need money for platform fees, samples and marketing.

Less risk. You don't own the inventory or the storage space. If a product flops, you simply remove the listing.

Less responsibility. When a customer orders, you place that order with your supplier. The supplier fulfills it and ships it to your customer.

Location independence. You aren't tied to a warehouse. You can manage customers and suppliers from anywhere.

Dropshipping cons in detail

Reduced profit margins. You pay the wholesale price plus the supplier's fulfillment fee. That leaves less profit per sale than buying in bulk.

Intense competition. Other dropshippers often sell the same products from the same suppliers. To stand out, you need strong branding, better service or a clear niche.

Not much quality control. You can't inspect each order. Order samples and read supplier reviews before you list a product.

Fulfillment errors. You don't pack or ship orders, but customers will hold you accountable if something goes wrong.

How much can you make from dropshipping? A worked example

Your profit is the retail price minus the supplier's price, shipping, payment fees and marketing. Here is an example with illustrative figures for one US order:

The 2.9% + 30¢ payment fee is the standard US online card rate at Stripe and Square; compare providers in our payment gateway guide. The other numbers are examples only. Store subscriptions, returns and app fees reduce the profit further.

Sales tax or VAT sits on top of this. Where you must collect it, you charge it to the customer and pay it to the tax authority, so it is never part of your profit.

How does dropshipping compare with wholesale and Amazon FBA?

Dropshipping has the lowest upfront cost, while wholesale and Amazon FBA need you to buy stock first but usually give better margins and faster delivery.

Want to compare further? Read our guide to how Amazon FBA works.

Do dropshippers have to pay VAT or sales tax?

Yes. A dropshipper is the seller of record, so you usually have to charge VAT or sales tax to your customers, even though you never handle the goods. Which rules apply depends on where the goods ship from and where your customers live.

EU VAT on dropshipping

In the EU, the rules turn on whether goods ship from inside the EU or are imported from outside it. The key rules are:

• The €10,000 threshold: if you are established in one EU country and your cross-border B2C sales across the EU stay at or below €10,000 a year (excluding VAT), you can charge your home country's VAT. Once you pass €10,000, you must charge VAT at the rate of each customer's country. Businesses established outside the EU can't use this threshold.
• One-Stop Shop (OSS): instead of registering in every country, you can declare and pay that VAT through a single quarterly OSS return in one EU country.
• Import One-Stop Shop (IOSS): for goods imported from outside the EU in consignments worth €150 or less, you can charge VAT at checkout and report it in a monthly IOSS return. The parcel then clears customs without the customer paying VAT on delivery. Sellers based outside the EU must appoint an EU intermediary. IOSS doesn't cover goods subject to excise duty.
• Consignments over €150: IOSS doesn't apply. Import VAT and customs duty are charged when the goods enter the EU.
• New €3 customs duty: from 1 July 2026, the EU charges a flat €3 customs duty per item type in consignments worth up to €150 sold by distance. It replaces the old duty exemption and runs until 1 July 2028, after which normal duty rates apply.
• Deemed supplier rules for marketplaces: if you sell through a marketplace or other electronic interface, the platform is treated as the seller for VAT in two cases. These are imported goods in consignments of €150 or less, and sales of goods already in the EU by sellers based outside the EU. The platform then charges and pays the VAT.

Dropshipping also creates a chain of two sales (supplier to you, you to the customer) with only one shipment. Where your supplier's warehouse sits can change which country's VAT applies, so check this before you sign up. Our guide to EU VAT, OSS and IOSS for distance selling explains the rules in more depth.

UK VAT on dropshipping: the £135 rule

In the UK, the dividing line is £135 per consignment. It works like this:

• Consignments of £135 or less sold direct: the seller charges UK VAT at the point of sale, so an overseas dropshipper selling into Great Britain needs to register for UK VAT.
• Consignments of £135 or less sold through a marketplace: the marketplace is liable for the VAT instead.
• Consignments over £135: import VAT and any customs duty are charged at the border.
• Goods already in the UK: overseas sellers must register for UK VAT on direct sales of goods of any value located in the UK. If those goods are sold through a marketplace, the marketplace accounts for the VAT.
• B2B sales: if a UK VAT-registered business gives you its VAT number, it accounts for the VAT instead.

The UK government is also removing customs duty relief on imports of £135 or less. The change will take effect by October 2028 at the latest.

US sales tax for dropshippers

In the US, a dropshipper must collect sales tax in any state where it has nexus. Nexus can come from a physical presence or from sales volume (economic nexus). Since the 2018 South Dakota v. Wayfair ruling, most states set economic nexus at $100,000 in annual sales into the state. Some also use a transaction count. Check each state in our economic nexus by state guide.

Dropshipping adds a second issue: the sale between your supplier and you. Normally you give your supplier a resale certificate so it doesn't charge you sales tax on goods you are reselling. But some states only accept a resale certificate from a retailer registered in that state. In California, for example, if the retailer holds no seller's permit, the drop shipper must report and pay the tax itself, usually passing the cost on to you.

If you sell through a marketplace such as Amazon or eBay, marketplace facilitator laws usually make the platform collect sales tax on those orders. You may still need to register and file for sales on your own website.

How can Taxually help dropshippers?

Taxually helps online sellers stay compliant as they grow across borders. CrossTax handles VAT registrations and returns in Europe, including OSS and IOSS filings. LumaTax handles US and Canadian sales tax for enterprises and service providers; ecommerce sellers can join its waiting list.

Do you need help with your VAT or sales tax compliance? Book a free call with one of our tax experts to find solutions for your business.

Sources

• European Commission: The One Stop Shop (OSS, IOSS, €10,000 threshold, deemed supplier)
• European Commission: Temporary €3 flat duty on low-value imports until 1 July 2028
• GOV.UK: VAT and overseas goods sold directly to customers in the UK
• GOV.UK: VAT and overseas goods sold using online marketplaces
• GOV.UK: Reforming the customs treatment of low value imports
• eBay: drop shipping policy
• Square Developer: payments pricing (2.9% + 30¢ US online)
• CDTFA Publication 121: Drop shippers and resale certificates

How Taxually handles this

Taxually’s CrossTax handles VAT registration, VAT, OSS and IOSS returns and fiscal representation in the countries you sell into, and checks your sales data against 250+ validation rules before each filing. OneTax then pays every tax authority with one bulk payment in your chosen currency.

Related guides

• What Is Amazon FBA and How Does It Work?
• Your Guide to Electronic Invoicing EU
• Taxually Recognized by the International Tax Review