Many crafters and artists who sell their handmade creations on Etsy wonder if they need to collect and pay sales tax on those sales. While paying taxes may not be the most exciting part of running a small business, it is an important responsibility. In this comprehensive guide, we will explain Etsy’s policies, each state’s requirements, and tips on how to handle sales tax as an Etsy seller.
Quick Answer: It Depends
The quick answer is: it depends. If you sell physical goods on Etsy, you may need to collect and remit sales tax in the states where you have an economic or physical presence (“nexus”). The requirements vary by state. Selling digital products only? You likely only need to collect sales tax in your home state. We explain more below.
Etsy’s Sales Tax Policies
Etsy provides an online platform for independent crafters, artists, vintage sellers, and craft supplies sellers to sell their items. As a marketplace facilitator, Etsy is required to collect and remit sales tax on purchases in many states. Here are some key things to know about Etsy’s sales tax policies:
- Etsy collects sales tax from buyers and remits it to the applicable states for orders shipped to addresses within the United States.
- The tax rate applied at checkout is based on the ship-to address. Etsy determines the appropriate local tax rate to apply.
- Etsy does not collect international sales tax. Sellers are responsible for complying with local laws.
- Etsy provides monthly reports to sellers showing all tax collected and remitted on your behalf.
In summary, if your Etsy shop makes sales to U.S. addresses, Etsy will handle collecting sales tax at checkout and filing returns in the applicable states. However, there are still steps sellers need to take to comply with state requirements (more details below).
Nexus: What Creates a Sales Tax Obligation?
If you sell taxable physical products or services, you may be required to register with tax authorities in certain states and collect/remit sales tax on orders shipped to those states. This requirement is triggered if your business has nexus in a given state.
What is nexus? Nexus refers to a sufficient connection between your business and a given state that requires you to register, collect, report, and remit state sales tax. This includes:
- Physical presence nexus – Having property, employees, inventory, or other assets in the state. Where you live or run your business operations.
- Economic nexus – Doing a certain dollar amount of sales into the state, which varies by state. May exist even without physical presence.
- Affiliate nexus – Having ties to businesses or partners in the state that engage in taxable activities on your behalf.
Most states have thresholds that allow “small sellers” to make some sales into the state before needing to collect sales tax. However, as an Etsy seller, your sales through the Etsy marketplace may contribute to exceeding those thresholds.
Sales Tax Collection Requirements by State
Sales tax requirements vary widely by state. Some key factors that differ include:
- State sales tax rate – Ranges from 0% to over 7% currently
- Taxable goods & services – What is considered “taxable” by the state
- Nexus thresholds – Dollar amount of sales that trigger collection responsibility
- Filing frequencies – How often returns must be filed
- Exemption certificates – Acceptance and handling of any exemption certificates
To understand your potential obligations, you need to look at the specific rules in each state. Let’s take a look at some examples:
California
- State sales tax rate: 7.25%
- Nexus threshold: $500,000 per year in sales
- Filing frequency: Quarterly and annual filings
If your total sales into California exceed $500,000 per calendar year, you must register with the California Department of Tax and Fee Administration to collect and remit sales tax on sales into the state.
New York
- State sales tax rate: 4% plus local taxes
- Nexus threshold: $500,000 per year in sales
- Filing frequency: Quarterly and annual filings
You must register for sales tax in New York if your total New York sales exceed $500,000 in one calendar year. New York has a lower 4% state tax but also has many local jurisdictions that each have their own local sales tax rates.
Florida
- State sales tax rate: 6%
- Nexus threshold: $100,000 per year in sales
- Filing frequency: Monthly and annual filings
Florida has one of the lowest nexus thresholds at only $100,000 in sales per year. Once you reach this amount, you’ll need to register and begin collecting Florida sales tax.
How to Handle Sales Tax as an Etsy Seller
As an Etsy seller, here are some tips for handling sales tax properly:
1. Review nexus thresholds and register in required states
Regularly review the latest nexus thresholds and economic nexus laws in each state. If your Etsy and other sales into a given state exceed the thresholds, take steps to register and start collecting. You can find nexus requirements on each state’s department of revenue website.
2. Understand your product taxability
Not all products are taxed in every state. Some states exempt food, clothing, and other necessities. Make sure you know the rules on taxable categories in your largest sales states. Exemptions for manufacturing equipment or resale certificates may also apply.
3. Save all sales records and receipts
Keep detailed records of all your taxable sales, overhead costs, income, and other tax-related records. You’ll need these if you ever get audited. Most states have a “statute of limitations” of about 3-4 years.
4. File sales tax returns and remit payment on time
Once registered in a state, you’ll need to start filing periodic sales tax returns to report your total taxable sales. Returns are usually monthly, quarterly, or annually. Payment must also be submitted for all sales tax collected. Consider sales tax filing software to simplify compliance.
5. Issue exemption certificates to exempt buyers
If a buyer is exempt from sales tax (e.g. wholesaler, reseller, tax-exempt organization), they should provide you with an exemption certificate. Keep these on file as proof that you properly exempted the sale from tax.
6. Claim tax deductions and credits
Don’t forget that the sales tax you collect is not income to you. You can deduct related expenses and may qualify for state tax credits for newly registered businesses. Speak to a tax pro to ensure you receive all eligible tax deductions and credits.
Sales Tax Collection Software
Collecting sales tax across multiple states can be extremely complex for a small business. Thankfully, there are software tools available designed specifically for ecommerce sellers that can simplify the process including:
- Automated sales tax calculations
- Access to up-to-date rates in over 10,000 jurisdictions
- Built-in reporting for filing returns
- Exemption certificate management
- Data integrations with POS systems, Etsy, and other platforms
Popular sales tax solutions include Avalara AvaTax, TaxJar, and Vertex. Most integrate directly with Etsy and other ecommerce store platforms. The right software can save you significant time and ensure sales tax compliance. Be sure to compare options to find the best fit for your Etsy shop.
Key Takeaways
Determining if you need to collect sales tax for your Etsy shop can be complex, but understanding your potential obligations is important. Some key takeaways include:
- Etsy handles collecting sales tax at checkout for orders shipped to U.S. addresses
- You may still need to register and remit taxes in states where you exceed nexus thresholds
- Registration is required if you have over $500K in sales to states like CA and NY
- Lower thresholds in some states like FL ($100K in sales)
- Manage exemptions properly and keep detailed sales records
- Sales tax software can simplify multi-state compliance
Check each state’s guidelines regularly and consider an accountant or tax professional for advice. With some upfront planning, staying compliant with sales tax as an Etsy seller is very manageable.