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5 Things Every Etsy Seller Needs to Know About Sales Tax

Etsy has a deliberately cultivated reputation as a small-time, wholesome marketplace for craftspeople looking to sell their wares. But if you're a seller on Etsy, you know that it is actually a thriving and extremely lucrative e-commerce system, where canny sellers can make serious money. Etsy's sales volume has shown consistent growth, with $2 billion passing through the site in 2014.

There is money to be made, which also means there are taxes to be paid. Taxation doesn't have to be a nightmare, but it can be if you don't get yourself organized from the outset. Here are some essential things for you to know about sales tax when selling on Etsy.

1. You Have to Think About Sales Tax

If you're based in one of the 45 U.S. states that imposes sales tax, you need to plan for that before you begin selling. You need to find out what states you have Nexus in—the states where your business has a significant presence. Then, you need to apply for and receive a valid seller's permit (also known as a sales tax permit) in order to collect sales tax in those states.

It is highly recommended that you keep tax-related income separate from your Etsy revenues and profits. That way you won't accidentally spend the sales tax you've collected. When it comes time to file your state sales tax returns, you want to be confident those tax dollars are waiting for you to pass them on to local and state tax authorities.

2. It's Up to You to Decide When to Collect Sales Tax

That's right! The decision to collect sales tax (or not) on Etsy sales is entirely up to the seller. Does it makes sense to collect, process, and remit sales tax for a handful of low dollar, annual purchases? Probably not. The cost of the dealing with the sales tax would far outweigh the risk not collecting posed. That being said, laws in states collecting sales tax clearly state that companies having nexus are required to remit collected sales tax.

We call this "materiality" and it varies for every Etsy seller. The responsibility of collecting sale tax lies squarely on the seller's shoulders and only they can assess the risk of not collecting compared to their personal risk tolerance.

3. Etsy Applies Sales Tax Rates for You

One of the great advantages of selling through Etsy is that Etsy will calculate sales tax for you. It checks your customer's shipping address, figures out the relevant sales tax for that area and adds it to the total transaction cost. Customers see the tax charges in a user-friendly and transparent way so they understand exactly what they're being charged.

To enable this functionality, Etsy sellers need to add a sales tax rate for the state(s) in which they intend to collect sales tax. The seller should also decide whether they intend to collect tax on shipping costs as that is another option Etsy offers. In an odd twist, Etsy requires all shops to be open to the public prior to adding state sales tax rates. Once rates have been entered, the seller must return to his/her listings and apply the sales tax rate. Tax rates should always be entered in decimal format.

It's very important to stress the fact that, Etsy is a "dumb" system with regard to sales tax. It's easy to configure the system from within your admin dashboard. However, it will only do what you instruct it to do. You need to input each state and the relevant tax rate accurately and you take full responsibility for doing so.

Remember, Etsy only does the calculations. It does not provide any advice on your tax exposure, and it doesn't offer any assistance on obtaining the correct rates. It simply collects the amount of sales tax that you ask it to.

4. Sales Tax May Apply to Shipping

As mentioned above, Etsy sellers have the option of applying tax rates to shipping costs. There is no consistency between states when it comes to taxes on shipping charges. Around half of the states require you to include shipping charges in the taxable sum. Among the others, some exclude it, and others treat it differently depending on whether it's bundled with a handling charge. Again, it's up to you to ascertain whether you need to charge sales tax on shipping. Once that's determined, it's easy to implement on Etsy. Beside every entry is a check box that gives you the option to tax shipping charges. Click on it and you're ready to go.

5. You Must File Your Own Tax Return

Etsy has strong reporting tools that give you a solid breakdown of your transactions in a given fiscal period. However, the hard work of filing and remittance is still up to you. A system such as Avalara TrustFile is great for the heavy lifting here and can process that raw data into a ready-to-send tax return. Sign up for a free TrustFile account today and you'll get your sales tax liability reports absolutely free!

Avalara Author
Ryan O'Donnell
Avalara Author Ryan O'Donnell