Online selling for hobbyists: When to collect sales tax
- May 31, 2017 | Stephanie Faris
Long before the internet became a part of every American household, people found ways to sell personal items to others. From flea markets to craft fairs to classified ads, consumers have been trading personal items and crafts for money for many years. The only thing that has changed in recent years is the venue.
For every business that uses eBay, Etsy and similar marketplaces to find customers, there are multiple individuals selling their wares through these sites. Some have found a way to monetize their household junk, while many others earn a side income from their crafting hobby.
But many hobbyist sellers wonder if they need to be collecting and remitting sales tax on the money they’re making. The answer? It depends.
Sales tax and nexus
Believe it or not, many businesses don’t even pay sales tax on their online sales. Under current laws, a seller must first have nexus in a state before being required to collect sales tax on the items sold to customers there.
Nexus has historically been defined as having a physical presence in a state. Although nexus laws can vary from one state to the next, generally a physical presence is defined as leasing or owning office space or another type of building, having a representative acting on your behalf, regularly attending events there or passing your products through a distribution center. But this is changing--some states have created affiliate, click-through and economic nexus laws to expand the definition of nexus.
Since sites like eBay and Etsy have sellers ship items directly to buyers, you won’t have to worry about third-party fulfillment creating nexus. However, if you ever contract with a third-party service such as Fulfillment by Amazon to handle your warehousing or shipping, you’ll need to determine whether products are stored or passed through physical buildings in states other than your own. This will activate your need to collect sales tax when you sell items to customers in those states.
Sales tax and hobbyists
Even if you sell items to someone in your own state, though, you likely won’t be required to collect sales tax as long as you’re a casual seller. In many states, if your online sales are the equivalent of an occasional garage or yard sale, you aren't required to collect sales tax on purchases. (Always double-check with your state authorities.) However, once your hobby might look like a business to a tax auditor, you’ll need to begin to treat it as one. If you have recurring sales, for instance, and a thriving customer base, you’ll need to register for a business permit in your state and every state where you have a physical presence and begin collecting and remitting sales tax.
Another behavior that can activate the need to collect sales tax is reselling. Sellers sometimes visit local yard sales or purchase items for the express purpose of making a profit in an online marketplace. This type of activity is considered business earnings, according to the IRS, and likely will be considered the same by your state tax auditors. As long as you’re earning a minimal amount on your online sales, though, you likely will have little to worry about.
Many accountants and businesses use sales tax materiality to advise a client on whether to collect sales tax on occasional sales, since the cost of tracking and remitting sales tax can well exceed any fines or penalties a taxpayer would be responsible for if audited.
Sales tax collection can be complicated, but for those who treat online sales as a hobby, the amount of revenue involved may not be enough to concern tax authorities. If you’re selling online as a side business, it’s important to carefully monitor your business’s growth and be aware that the time will likely come that you’ll need to start collecting tax on your earnings.
When that time comes, we can help.