Everything You Must Know About Etsy and Sales Taxes
- Sales Tax
- Feb 23, 2016 | Gene Marks
Etsy is the ecommerce world’s gift to artists who want a profitable outlet for their talents. Some consider their Etsy shops just as a hobby on the side while most consider Etsy a possible income stream.
Since it’s easy to sign up, it’s not uncommon that sellers and would-be sellers forget that selling on Etsy is still a business activity that’s governed by laws. The fact is that selling on Etsy is essentially a retail business in which all sales are subject to sales taxes. For Etsy sellers who have never been involved in business, charging sales taxes might seem a bit too complicated.
It’s a common pain for Etsy sellers. A quick Google search for "Should I charge sales taxes on Etsy?" will bring up forums with thread after thread of confused sellers who just want clarity about sales taxes on Etsy.
If that's you, too, this post has everything you need to know about Etsy and sales taxes.
Should Etsy Sellers Collect Sales Taxes?
Whether you’re making “hobby income” selling one trinket a year or paying off your mortgage just from Etsy earnings, you must check local tax rules if you should be collecting and remitting sales taxes.
If you’re selling on Etsy as a hobby, most states have standard rules that help you identify whether your hobby is already classified as a business.
If you’re cashing in steadily from selling your homemade knitwear on Etsy, it’s probable that you need to collect sales taxes on them. Yet, if you only sold one handmade top you knitted in the wrong size, your sale is likely classified under “Isolated and Occasional Sales.”
One-off selling falls under “isolated sales.” If you build intricate bottle castles and sell one every six months, the sale will probably fall under “occasional sales.” Sales taxes are not imposed on isolated and occasional sales. However, state rules vary in terms of determining if sales are isolated or occasional.
Is your Etsy store paying most of your mortgage? Skipping TV time to learn more about SEO and get traffic to your store? Do you spend extra hours sourcing products or creating them to meet rising demand?
If your Etsy store is a business and you’re clear on that, you most probably need to collect and remit sales taxes.
What's Nexus and Why Should Etsy Sellers Care?
Your quest toward fully understanding sales taxes on Etsy begins with identifying where you have nexus.
Also called “sufficient physical presence,” nexus is a legal term that refers to the connection that a seller has with a particular location. If a seller has nexus in a state, they have to follow sales tax regulations in that state.
For most Etsy sellers, identifying where they have nexus is as simple: If you live and do business there, you have nexus there. This is enough for most Etsy sellers to know, since the site is filled with home-based artists and craftspeople.
However, there are cases where a seller develops nexus in a location other than their home state. Here are some questions to ask yourself to determine whether you have nexus in a different state.
- Have employees or “helpers” from another state?
- Store inventory in another state?
- Ship from another state?
- Sell goods regularly in another state?
The criteria for determining where you have nexus varies state by state, so check out these sales tax state guides to figure out your situation.
After you’ve identified where you have nexus, check state sales tax regulations. From there, you'll get four essential pieces of information stated in a guide on Etsy.com:
- Are you selling taxable items?
- Which customers do you collect sales taxes from?
- How much sales tax do you need to collect?
- Do you need to register before collecting sales taxes?
The answers to these questions vary from state to state, so make sure you check particular regulations for your location.
Registration details are especially important. Not all sellers need to register even when they’re selling taxable items. It still depends on the state.
In Colorado, "If you are a home-based craftsperson, artist, or other kind of small home business operator, you do not have to purchase a sales tax license if you make only occasional or isolated sales of tangible personal property from your home that totals no more than $1000 a year."
In New York, “If you will be making sales in New York State that are subject to sales tax, you must register with the Tax Department and obtain a Certificate of Authority...For example, if you sell taxable items at a craft fair only once a year, you are required to register, and to collect and remit sales tax, because what you are selling is taxable in New York State.”
When you’ve determined that you need to register, check state regulations for the registration requirements.
States like California only allow you to register online. States like New York and Florida provide the option to process paper registration. However, this method isn’t recommended because government offices are aggressively phasing out paper registration.
How Do You Charge Sales Taxes on Etsy?
On the whole, Etsy is pretty hands-off on tax matters.
Etsy doesn’t calculate sales tax rates for each transaction. It's important to know that sales tax rates vary immensely state by state, zip code by zip code, and case by case. You have to look up the sales tax rate that applies to your particular situation considering where you have nexus and other local tax regulations. If you're unsure how much to charge, you should consult an accountant in your area or the tax authorities.
Despite being hands-off, Etsy isn't leaving you in the dust. What’s great is that Etsy automates the process of charging sales taxes. As long as you know the tax rates that apply to you and the areas you ship to, you just need to manually input those percentages into the website. Etsy will add the rates to all your listings if you wish it to do so. A more detailed guide is available on Etsy.com.
If you’re selling in-person, use the "Sell on Etsy" app to add sales tax to the transaction. Say, you’re selling your products at an art fair, having the app on hand allows you to easily collect sales tax on your sale. You can change the rates for transactions by creating particularized tax profiles. Etsy also offers a thorough guide on sales taxes for in-person selling.
Take some time to sit down and figure out your sales tax situation. A few hours wrangling the numbers is nothing compared to being unfriendly with the IRS.
Disclaimer: The term 'Etsy' is a trademark of Etsy, Inc. The Avalara TrustFile connector for Etsy uses the Etsy API but is not endorsed or certified by Etsy, Inc.