Person pouring candles.

Does Etsy Collect Sales Tax? What Sellers Need to Know.

When it comes to marketplaces, Amazon or eBay still feel like big-box retailers compared to the farmers’ market vibes on Etsy. Due in large part to its emphasis on unique handmade goods, Etsy also has a range of sellers, from folks selling wares as a hobby to people running a full-time arts and crafts business.

The platform itself is a big-time business, though. In 2023, gross sales on Etsy exceeded $13 billion. But what does that mean for Etsy taxes? It means Etsy is large enough that it has to automatically collect and remit sales tax in states that have marketplace facilitator laws — just like Amazon and eBay.

But that doesn’t mean sellers are off the hook for all things sales tax. Whether you’re making jewelry, designing posters, pouring candles, or smithing metals, here are some key things you need to know about keeping your Etsy business sales tax compliant:

What is nexus and what does it mean for Etsy taxes?

One of the first things to understand about sales tax compliance is the concept of nexus, which is a relationship with a state that obligates you to register for, then collect and remit sales tax. There are several ways to establish nexus, the two most common being:

Physical nexus: You have sales tax nexus in any state where you have a physical presence. For many of the crafters who sell on Etsy, the only point of nexus will be the location of their home or studio. But if you regularly sell at craft fairs or farmers’ markets, you’ll need to comply with tax rules and regulations in those jurisdictions as well. Physical nexus can also apply if you have employees or partners in other locations. Ditto if you store goods in or sell goods from an off-site warehouse or distribution center.

Economic nexus: This is a big one for online sellers. Economic nexus is triggered when you meet the thresholds for sales activity into a state. Each state has their own rules for establishing economic nexus, revolving around sales or transaction numbers. Most states count exempt sales toward those minimums, but a few, like New Mexico and Oklahoma, don’t. So even if your sales on Etsy are tax-exempt, you may still have sales tax obligations, like registering and filing.

Regardless of how you establish nexus in a state, once you do, you’re generally required to register to collect and remit sales tax. It’s illegal to collect sales tax without a permit, you’ll have to follow the steps for the individual jurisdiction to apply. The process can be different depending on the state, and sometimes a fee is required.

Several states also have exemptions for small-batch sellers. That way, hobbyists with a couple sales per year may not have to worry about tax compliance. But the rules are typically narrow and vary for each state; it’s up to sellers to make sure they follow the rules wherever they sell.

How do marketplace facilitator laws affect Etsy sellers?

All states with a sales tax or economic nexus laws also have marketplace facilitator laws. These laws are designed to reduce the burden on managing tax compliance for smaller sellers, shifting most of the responsibility to the platforms themselves. Again, Etsy is a large enough marketplace for these laws to apply.

For the most part, Etsy is required to collect and remit sales tax on behalf of its retailers. But this requirement only applies to sales made on the platform. Any additional sales, whether made in person or through other online sites, must be managed by the seller.

Five things to do to manage Etsy sales tax

In order to properly manage sales tax compliance for your Etsy business, here are five things you need to do:

  1. Determine which states you have nexus in. It all boils down to whether you have a qualified physical, economic, or business connection to a state. Take stock of all the channels you sell through, both online and offline, as well as where you have employees, business partners, or goods. 

  2. Understand where you need to have a sales tax permit. Once you know where you have nexus, you need to register to collect sales tax. However, in many states, simply selling through Etsy may not establish nexus and you may not be required to register your business. It’s important to review the sales tax laws everywhere you do business to make sure you comply with state and local requirements. Even in places where Etsy is responsible for collecting taxes, you’re still required to assign the proper category to the products for Etsy to do so. 

  3. Track Etsy sales tax deposits on payments made via PayPal. You may have buyers submit their payments directly to your PayPal account instead of Etsy Payments. If the order otherwise meets the criteria for Etsy to remit sales tax on your behalf, Etsy will provide the sales tax as a part of the payment. Etsy will then deduct the sales tax from your account in order to remit the tax to the relevant state.

  4. Add tax to shipping or gift-wrapping services, if required. Some states require businesses to include shipping and/or gift wrapping in the taxable amount. If you don’t know the rules and regulations of the states where you have nexus, you might not be collecting enough tax — a situation that can lead to an unpleasant (and perhaps expensive) surprise. Once you know whether to apply tax on shipping or gift wrapping, you can set it up on your Etsy listings.

  5. File your own returns, if required. Even if Etsy is required to collect and remit tax on your behalf, some states still require marketplace sellers to register and file returns. Etsy may break down your transactions for you and tell you how much sales tax your business has collected then remit the tax on your behalf. However, you must still prepare and file a sales tax return. If you don’t want to do all of that heavy lifting yourself, you can integrate Avalara with your Etsy account to process your data into a signature-ready return, allowing you to focus on selling instead of worrying about sales tax.

Additional tax support for Etsy sellers

Sales tax isn’t the only tax you need to be concerned with when it comes to selling on Etsy. Depending on how much you earn from your Etsy sales, you may receive a 1099-K from Etsy.

The default threshold for Etsy to issue a 1099-K is $20,000 in sales or 200 transactions. However eight states have filing requirements with significantly lower numbers, including thresholds as low as $600 or four transactions.

It’s important to understand your obligations and properly submit this tax information when filing your personal income tax returns each year.

Using software to manage Etsy sales tax and returns for your business

Few (if any) sellers open an Etsy shop and look forward to managing sales tax compliance. While marketplace facilitator laws do make compliance easier for sales made on Etsy, the laws won’t do anything to simplify your process for taxes collected through other means.

If you supplement your Etsy store with other ecommerce and social media platforms or in-person sales, you’ll need to incorporate your sales tax collection, filing, and remittance across all channels.

One way to simplify the process is through sales tax automation. You can use the Avalara AvaTax extractor for Etsy as well as integrations for other invoicing, POS, and ecommerce software to streamline tax compliance. It also works with Avalara Returns to make it easier to prepare sales tax returns for each state in which you’re required to file and remit taxes.

To find out if Avalara is right for your Etsy business, contact us today.

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