5 things every Etsy seller needs to know about sales tax
- Oct 24, 2018 | Mike Plaster
Compared with Amazon or eBay, Etsy maintains a small-time, homegrown feel, thanks to its emphasis on unique handmade goods.
The platform and its sellers are doing big-time business, though. In 2017, gross sales on Etsy exceeded $3 billion. In fact, Etsy is large enough that it has started to automatically collect and remit sales taxes in some states that have marketplace facilitator laws — just like Amazon and eBay.
If you sell outside of those states, however, collecting sales tax might be your responsibility — whether you’re doing big business on the site or just starting out. Below are five things you should know about sales tax on Etsy.
- It’s on you to figure out if you have to charge sales tax in a particular state. It all boils down to whether you have nexus, or a substantial connection to a state. That used to mean having a physical presence, such as an office or employees. Today, however, many states now have economic nexus laws as well, which require businesses to collect and remit sales tax if they exceed a certain threshold for revenue or transactions in that state. To learn more, see our post on how out-of-state sales can impact your business.
- Before you start collecting sales tax, you must have a sales tax permit. It’s illegal to collect sales tax without a permit — so if you have nexus in a state, you’ll have to follow the steps to apply. The process can be different depending on the state, and sometimes a fee is required. You can find more information on when and where to get permits here.
- Etsy will add sales tax to your listings — but you have to tell it to do so. The platform has a sales tax tool that allows sellers to specify a tax rate by state, individual ZIP code or a range of ZIP codes. However, you need to find the applicable rates and set them up in your account. New listings will have that tax rate applied automatically; for listings created before you set up the tax, you’ll want to check to make sure the items are marked as taxable and that the rate is applied. Remember, sales tax rates do not always adhere to ZIP codes. For example, in Alabama, within one ZIP code there are nine unique tax areas and five different rates ranging from 5 percent to 9 percent. That’s a big difference, and if you only go by ZIP code to determine rates, you could collect the wrong amount. We recommend making sure you always have the right rate by automating your sales tax calculation — our team of tax professionals regularly updates rates by exact location (not potentially inaccurate ZIP codes) right within your business or marketplace software.
- You might need to add tax to shipping or gift-wrapping services. 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. So do your research. Once you know whether to apply tax on shipping or gift wrapping, Etsy makes it easy to set this up on your listings.
- You still need to file your own returns. Etsy will break down your transactions for you and tell you how much sales tax your business has collected, but in most states, it’s your responsibility to remit and file returns. (In marketplace facilitator states, you only need to file returns, since Etsy automatically remits the taxes on your behalf.) If you don’t want to do all of that heavy lifting yourself, Avalara can help by integrating with Etsy and processes your data into a ready-to-send return, allowing you to focus on selling instead of worrying about sales tax.
If you are like most Etsy sellers, you would probably prefer to spend your time creating beautiful jewelry, clothing, pottery, or other artwork rather than nose-deep in your business financials. At some point, however, money will demand your attention.
One of the tricky subjects for all online sellers is the question of sales tax: charging your customers correctly, tracking what you owe, and paying on time. Even if your sales volume is as tiny as a pair of stud earrings, you are most likely still responsible for collecting and remitting sales taxes on some of your online sales.
Etsy’s small-batch sellers
According to a 2013 Etsy report, selling is a full time profession for only 18 percent of the site’s makers and crafters. Thirty-seven percent sell on Etsy in addition to holding down a full- or part-time job.
The average Etsy seller takes in a bit less than $1,500 per year (based on Etsy’s first quarter 2015 financials reporting $531 million in revenue made by 1.4 million active sellers).
If you are one of Etsy’s many small-scale sellers, you may find it challenging to do everything your business requires on top of working in other roles that help butter your bread. Building your Etsy business requires buying supplies and making your products, keeping your Etsy listings fresh, and shipping out orders to customers. On top of all that, you still need to find the time to file the same quarterly sales tax returns.
Small is beautiful when it comes to nexus
It used to be that being a small seller kept your nexus worries at bay. You have sales tax nexus in any state where you have a physical presence. For most of the crafters who sell on Etsy, the only point of nexus will be the location of their home or studio. South Dakota vs. Wayfair may have changed that for more successful Etsy selleres. Now, sales tax nexus may be triggered based on total sales revenue or total number of sales. Be sure to understand the latest nexus rules for the states into which you are selling your Etsy goods.
What is "nexus" and should Etsy sellers care?
Your quest toward fully understanding sales taxes on Etsy begins with identifying where you have sales tax 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.
Etsy sales tax support
The only sales tax support Etsy provides for its sellers is an article explaining the sales tax obligations and a page explaining how to set up your Etsy shop to add sales tax to your sales to customers who live in the state where you have nexus. The site leaves the hard work up to you--determining whether your goods are subject to sales tax, where you have nexus, and the applicable sales tax rates. “It's up to each seller to research their local laws about collecting and reporting taxes for their Etsy sales,” says the site.
Sellers are responsible for entering the sales tax rates and keeping those rates up to date. If you forget to update your sales tax rate, you will be on the hook for any additional tax you fail to charge your customers.
If you owe sales tax on your goods and you don’t collect it and remit it to your state taxing authority, you could end up owing penalties and interest on top of your missing returns.
Etsy sales tax reporting tools
Etsy allows you to download your transactions into a CSV file, which can be opened with a spreadsheet program such as Excel.
You can download a month’s or a year's worth of sales. If you file your sales taxes on a quarterly basis (the most common reporting period), you will need to download each month in the quarter you are reporting.
The data you download will include sales taxes charged, and that’s about where Etsy sales tax reporting support ends.
Ultimately, it’s up to you to determine whether you actually charge sales tax on Etsy. Aside from sales in states where Etsy automatically collects and remits tax, you have a choice as to whether or not to charge it. We recommend consulting with a tax professional to best define a tax process for your business.
All in all, only you can decide what’s right for your business — and if that means charging sales tax, Avalara Returns for Small Business can help make sure you get that right, too.