As online shopping becomes a larger and larger part of the economy, many states are adjusting their sales tax rules to pick up revenue from online sales. Since these laws are set at the state level, they can vary significantly. This can be confusing, especially for online businesses that sell to multiple states. These are five things Etsy sellers should understand about sales tax on the platform.
1. Each State Has Its Own Threshold for Requiring Sales Tax
Since the 2018 Supreme Court decision in South Dakota v. Wayfair, states have been allowed to require sellers to collect sales tax when the seller does a significant amount of business in the state. In the past, this was only required when a seller had a physical location in a particular state.
The amount of business that requires you to start collecting sales tax is called the economic nexus threshold, and it is set by states individually. The threshold can be a number of transactions or an amount of revenue. If you sell on another platform in addition to Etsy, such as your own website, it's important to remember that the threshold applies to the total of all your sales.
2. Sales Tax Is Usually Based on the Shipping Address
Sales tax varies depending on the state and, in some cases, by the item. Thus, understand how to calculate it properly. For remote sellers, the sales tax rates are determined based on the buyer's shipping address in most states. This means that if you're sending a product to a customer in New York, you need to charge New York sales tax if the product is taxable, even if you live in Pennsylvania.
3. For Most States, Etsy Collects and Remits Sales Tax for You
Etsy keeps up with changes in sales tax law to keep things as straightforward as possible for sellers. As of the summer of 2021, Etsy handles sales tax for 44 states, the District of Columbia, and Puerto Rico. For these sales, Etsy will calculate the local sales tax, charge the buyer and send the tax along to the state. Missouri recently became the last state with a sales tax to pass a law requiring online, out-of-state stores to collect that tax starting in 2023.
Etsy will likely start collecting sales tax from Missouri buyers by that time. Delaware, Montana, New Hampshire, and Oregon do not have a sales tax. Alaska does not have a state sales tax, but several of its municipal governments impose a local one. Etsy offers a sales tax tool that allows you to charge the required sales tax yourself through your listing.
4. Whether Your Product Is Taxable or Not Varies for Etsy Sellers
Each state has its own rules for which items are and are not subject to sales tax, and these can sometimes be complicated, especially for the types of handmade goods that are typically sold through Etsy. For example, in Pennsylvania, yarn is taxable except when it's being used to make clothing. Other common Etsy products that are exempt from sales tax include food and downloadable digital products. In many states, non-taxable sales usually do not count toward your economic nexus threshold, so make sure to keep close track of your records, especially if you sell a mix of taxable and non-taxable goods.
5. You Might Still Need to File a Sales Tax Return, Even if Etsy Collects Taxes for You
The state where your Etsy shop is physically located, generally where you live, may require you to file a sales tax return. If you're in a state where Etsy collects and pays your sales tax for you, this will generally mean reporting your sales and indicating that Etsy has already collected and remitted taxes on those sales. If you're located in a state that requires you to collect sales tax yourself, report and remit those funds.
Learn More About Sales Tax for Etsy Sellers
Understanding the requirements for charging sales tax can be complicated and working with an experienced professional can help. Get in touch with Sales Tax Helper to speak with an expert sales tax consultant today.