If you’re in the business of making crafts, craft fairs are where you shine! You love setting up shop (or, booth) at local craft shows or flea markets to share your creations with the community and make some cash while doing so. As the transactions are rolling in, suddenly you wonder if you should be charging sales tax to your customers. The answer is: it depends on what state you’re in, but most states require sellers to remit sales tax for the retail sale of products and certain services. Let’s explore whether you should be charging sales tax or not, and the best way to go about it.
Sales Tax 101
Generally, sales tax is a state and/or local tax imposed on the sale of tangible personal property (more commonly known as goods and services). The seller will collect sales tax based on the total sales price of the taxable items from the customer and then remit the taxes to the government( typically the Department of Revenue). The taxes are remitted during a reporting period, which varies by state but is commonly once a month.
The percentage of sales tax varies depending on the state (and sometimes at the county or city level), and what the product or service is. Before you can charge customers for sales tax, you typically need to be registered for a sales tax permit in the state where the taxable sale is being made.
Most products that you sell at a craft fair are subject to sales tax since they are products you made that are being sold to an end-user. You start to run into some complexities when it comes to selling food or expensive clothing but it’s safe to assume that your items are taxable. The handful of states that do not have a general sales tax are Alaska, Delaware, New Hampshire, Montana, and Oregon (but Alaska and Montana have some local sales taxes).
The best places to find current information about sales tax in your state are the Department of Revenue website for your state and the Small Business Administration. Tax software programs often have built-in sales tax rate calculators by state which can also help you keep track and remit sales tax. This comes in handy when you’re selling in multiple states.
By having a sales tax permit, you will be able to purchase inventory, raw materials, etc without having to pay sales tax. Since you are creating a product that is going to be resold, the sales tax skips over you and will then be collected by your customer. In order to get the sales tax exemption, the vendor will need your sales tax number and possibly a resale certificate.
Sales Tax for Temporary Vendors
True to theme, every state treats temporary vendors differently. Some states treat temporary vendors, such as people who sell their taxable goods and services at special events on an irregular basis say at a craft fair or trade show, the same as someone who has a brick and mortar store in town and sells every day of the year. Other states will let vendors apply for a temporary sales tax permit, which simplifies the sales tax reporting process for temporary sellers.
Most craft fair event organizers understand the complexities of sales tax (and probably receive a lot of questions from their vendors) so they will likely provide all the information to their vendors that they will need about remitting sales tax in that state. In some states, they are required to provide that information. The event promoters will ensure all the vendors will have their sales and use tax permit as they will be liable for any taxes not collected.
Tips for Collecting Sales Tax at In-Person Events
If you are selling in a different state from your home state where you need to remit sales tax, you should show the tax separately on the receipt or somehow indicate that you included tax in the price of the item you sold.[1] You will need to file a sales tax return monthly, quarterly, or annually, based on the state(s) you’re selling in and the amount that you sell. Some states, like Texas, require you to file a sales tax return if you hold a sales tax permit even if you didn’t have any sales.
Income Taxes
Selling at craft fairs could be considered either a side gig and a source of “fun money” for some, or for others it could represent their primary income source. Does it matter when it comes to reporting income for tax purposes? The answer is: nope. According to the IRS, if you make income from selling items at a craft fair, whether it’s a hobby or your primary business, you are required to report the income on your tax return.
The difference comes into play when you are taking deductions. If selling at a craft fair is a hobby for you, the expenses you pay for your hobby cannot be deducted and you must still report the income you receive for selling your items on Schedule 1, Form 1040, line 21.[2] If it’s a business, regular business deductions apply. How do you know if your craft fair selling is a business or a hobby? The IRS has nine factors that you need to consider:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.[3]
Conclusion
Although sales and use tax protocol varies widely by state, it is likely that the business owner will be responsible for remitting sales tax on their craft fair sales. The rules are always changing, especially when it comes to services and online sales since these two sectors have grown tremendously in recent years. In order to stay up to date on the sales tax rules in your state, head to the Department of Revenue website for your state and stick it to your favorites bar. The Small Business Administration also has a great resource that walks you through how to determine what your sales tax obligations are.[4]
Taxes are inevitable (I will spare you on the “death and taxes” joke), but you shouldn’t let that stop you from sharing your creations with the world (or your town) at your local craft fair.
[1] https://comptroller.texas.gov/taxes/publications/96-211.php
[2] https://www.irs.gov/newsroom/tips-for-taxpayers-who-make-money-from-a-hobby
[3] https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses
[4] https://www.sba.gov/business-guide/manage-your-business/pay-taxes