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Does Etsy Collect Sales Tax?

Does Etsy Collect Sales Tax?

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Does Etsy Collect Sales Tax?

Does Etsy Collect Sales Tax?

All consumers in the United States should be aware of sales taxes, which are taxes applied to the sales of most goods and services. While different U.S. states have different tax laws, the national average sales tax comes in at around 6.25%. 

Etsy shop owners should also be aware that sales tax may apply to the goods they sell on the site, including both handmade and vintage items. However, sales tax may vary according to each buyer that purchases items from an Etsy shop, and U.S. sales tax only applies to buyers in the United States. 

Related: How to start selling on Etsy

Do I Need to Add Sales Tax on Etsy?

Etsy collects sales tax automatically, and there is no action required on the seller’s part when it comes to sales taxes. Etsy does not charge you, as the seller, any fees for the automatic calculation and collection of sales tax on orders. 

As of 2023, Etsy calculates and collects sales tax for all 46 states where online sales tax is required to be remitted and for both the District of Columbia and Puerto Rico. In the past, sellers were required to calculate and collect sales tax for some of these states and territories on their own; however, this is no longer a requirement, and Etsy shop owners do not need to add sales tax to their shop items themselves.

Which States Does Etsy Collect Sales Tax?

As mentioned above, Etsy automatically collects sales tax for you in 46 states and 2 territories where it is required by law. Four U.S. states are currently exempt from sales tax on Etsy, and these include Delaware, Montana, New Hampshire, and Oregon. You, as a seller on Etsy, are also not required to collect sales tax (sometimes referred to as sales and use tax) for these states, whether you have buyers in these states or are selling from these states yourself. 

Alaska and Colorado are included as states subject to state sales tax on Etsy, although these states only require sales tax to be taken from buyers in certain cities. In those cities, local governments will take sales tax from buyers, and Etsy will automatically determine if this applies to buyers who buy items from your shop. 

How To Manage Your Etsy Sales Tax

While Etsy has improved over the years to manage sales taxes for sellers, its system is not perfect and cannot cover all instances where sales tax should apply. In many cases, a seller’s local or state government may require an additional sales tax to be applied to items they sell through Etsy. For example, sellers who sell to buyers in the state of New York are subject to a sales tax of 4%, but sellers who sell to buyers in New York City are subject to an additional 4.5% sales tax on top of the original 4% tax. In a case like this, sellers who reside in New York will need to set up a manual sales tax to apply to buyers who come to them from New York City. 

Manual sales tax for specific instances can be set up and edited in every Etsy seller’s Shop Manager, using Etsy’s sales tax tool. You can find the page for managing Etsy sales tax under the Payment Settings tab, then under the Sales Tax sub-tab. In this manager, you can add a specific sales tax percentage to be applied to certain zip codes or states. Remember, this additional sales tax will apply to a buyer’s shipping location, not your location as the seller. 

Which Products Are Exempt from Sales Tax on Etsy?

Some items may be exempt from sales taxes on Etsy depending on what the item is and who it is being sold to. There are hundreds of tax-exemption examples, but three general rules for tax exemption are items that are considered to be grocery items, items that are considered to be wholesale or are meant to be resold after purchase, and items that are sold to buyers who represent tax-exempt organizations. Different states will look at these three categories differently, and not all states or local municipalities will accept these reasons for tax exemption. 

As a seller on Etsy, you are not required to provide tax exemption unless the seller buying from you provides acceptable documentation for tax exemption. If a seller comes to you asking for tax exemption, you should always consult Etsy before permitting the tax exemption. Etsy will likely collect sales tax on the transaction between you and the seller before refunding the sales tax to the seller from your transaction. 

Do You Need a Tax ID to Sell on Etsy?

All U.S. Etsy sellers are required to provide a business or individual tax ID to Etsy for income tax to be reported to the United States Internal Revenue Service (IRS). This may either be an individual’s social security number if the business is taxed as a sole proprietorship or partnership, or a business taxpayer ID from the IRS, which is officially called an Employer Identification Number (EIN).

Related: How to apply for an Employer Identification Number

As of 2023, all sellers who make a revenue of over $600 in sales will have their Etsy income automatically reported to the IRS. However, all Etsy sellers are also advised to report their income taxes properly with their local, state, and federal governments. 

Etsy does not collect or issue these licenses. However, your Etsy business may still be required to have a valid sales tax ID according to your local or state regulations. In essence, this license is given to businesses that will be responsible for reporting and sales tax collections in those states.

Related: State guides for registering for a sales tax permit

At a minimum, a sales tax permit will be needed by an Etsy seller that has a physical presence in a state, (referred to as economic nexus or sales tax nexus), for example, owning a brick-and-mortar store or warehouse, having employees, storing inventory, etc.) Also, sales tax laws vary in each state, but generally, if a small business owner sells over a certain amount or exceeds a number of taxable transactions in a state where they don’t have a physical presence (referred to as a remote seller) they will have to register and report sales tax revenue made to those residents. This is a relatively new development, and to make matters more confusing, each state has different thresholds, but in general, most states require that when a remote seller has made over $100,000 in sales or has had at least 200 transactions annually, they are required to register for a sales tax permit in that state. 

Sales tax laws are very complicated, and I recommend getting tax advice from a CPA or service like 800-Accountant rather than trying to figure it out on your own, as a mistake can be costly.  

This material is property of StartingYourBusiness.com

Etsy Sales Tax FAQ

Are handmade items taxable?

Yes, most handmade items on Etsy are taxable, and nearly all of these items will be taxed automatically, should the customer live in a state that charges sales tax. There are some instances where handmade items may not be taxable though, such as with yarn made for clothing creation sold to a customer in Pennsylvania. Exemptions like these will need to be justified by customers through Etsy directly in order for the exemption to be made though. 

Are digital items sold on Etsy taxable?

Digital products sold on Etsy are subject to sales tax in some states and territories of the U.S. Etsy will automatically determine those cases and collect or not collect sales tax as needed. 

Related: Can I sell Canva designs on Etsy?

Does Etsy follow the marketplace facilitator law?

Etsy, just like eBay or Amazon, is considered to be an online marketplace, and it is subject to the marketplace facilitator law that has been enacted in nearly all U.S. states and territories. In places where this law applies, Etsy is required to take and remit sales taxes for transactions made by buyers in those areas. 

What Is Etsy’s sales tax rate?

Etsy will follow the sales tax rates of every individual state, territory, and/or city as needed. Sales tax rates vary across the U.S., although the average rate comes in around 6.25%.

Do you need a business license to sell on Etsy?

A business license is required by Etsy; however, the state, county, and local municipality where your business is located may require you to have one in order to operate legally.

Related: What business licenses do Etsy sellers need?

Do you need an LLC to sell on Etsy?

The short answer is no. Etsy doesn’t care what business entity you choose. There are four main types of entities include a sole proprietorship, partnership, corporation, or LLC.

Learn more about business structures for Etsy sellers.

Author

  • Greg Bouhl

    With over two decades as an entrepreneur, educator, and business advisor, Greg Bouhl has worked with over 2,000 entrepreneurs to help them start and grow their businesses. Fed up with clients finding and acting on inaccurate and outdated information online, Greg launched StartUp101.com to be a trusted resource for people starting a business.

Does Etsy Collect Sales Tax?

Does Etsy Collect Sales Tax?

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