Etsy Sales Tax

Zamp Learnings:

• Etsy collects and remits state sales tax for most transactions.
• The Etsy platform determines sales tax rates by the buyer’s shipping address.
• While Etsy provides a way to charge and remit sales tax, it fails to ensure that the tax amounts will fully satisfy your sales and use tax reporting obligations. 

With a focus on homemade goods and services, Etsy may seem like a small business platform— but it does big business. The company generated $2.7 billion in revenue in 2023 alone and collects and remits sales tax on behalf of business owners.

While the company handles this for sellers, it can often be confusing as Etsy sellers still have to consider and track when to charge sales tax, how much to charge, when to collect it, and where to remit it. This can be challenging and confusing for owners as everything differs by state, which is why a sales tax management solution like Zamp can help.

Today, we’re diving into the world of Etsy sales tax and everything you need to know.

Sales Tax for Etsy Sellers

Thanks to the digital age, the landscape of retail and business operations has changed dramatically, especially in e-commerce. This has caused small and large businesses alike to try and manage their sales tax responsibilities across various regions and states. This has made navigating sales tax regulations difficult as everything varies from one state to another and from city to city.

Does Etsy Collect Sales Tax?

Etsy acts as a marketplace facilitator for online sellers, meaning it automatically calculates, collects, and remits US sales tax on behalf of sellers. This applies when:

• An order ships to a recipient in the US
• A digital order is purchased by a US buyer
• The order meets specific criteria

While Etsy calculates sales tax on most orders, the rate that is charged will depend on a state’s specific sales tax laws and how the item is listed. You will also be responsible for charging, collecting, and remitting sales tax for any sales not made on the platform, whether in person or through other online sites like Amazon.

Whether you are an Etsy shop or have an Amazon store, it’s essential to use an automated sales tax solution to ensure you pay what you need to the states. The best automated sales tax solutions, like Zamp, also include integrations that allow your orders to be synced for automatic transaction imports to ensure compliance.

What States Does Etsy Collect Sales Tax For?

Etsy collects sales tax in 47 states plus Puerto Rico. However, in Alaska and Colorado, there are no sales tax obligations with the state, only through local governments that impose and administer their own local sales and use taxes.

How Sales Tax Works on Etsy

As a marketplace facilitator, Etsy charges, handles, and remits sales tax for you. However, you’ll want to know the ins and outs of economic nexus to understand your state sales tax obligations with your Etsy business.

How Nexus Works

Nexus is defined as a sufficient physical or economic connection to a state or locality that requires you to collect and remit sales tax in that jurisdiction. Here’s a closer look at the two most common ways to establish nexus:

• Physical nexus: You have sales tax nexus in any state where your business has a physical presence. For Etsy store owners, this could apply to your studio or home.
• Economic nexus: As an online seller, economic nexus generally applies to your business. It’s triggered when you meet the thresholds for sales activity in a state. Each state sets its own tax rules for establishing economic nexus, which usually revolve around sales or transaction numbers.

For Etsy store owners, determining where you have a sales tax nexus will guide your compliance strategy. This includes identifying where your business activities give you a tax obligation and ensuring you understand each area’s specific tax collection and filing requirements.

Sales Tax Thresholds

Nexus thresholds focus on how much of a connection a business has with a state that makes it subject to sales tax. Some states might have a dollar amount that triggers nexus, while others might look at the number of sales transactions.

Marketplace facilitators, such as Etsy, Amazon, and eBay, must adhere to the rules in each state. For example, in California, marketplace facilitators must collect and remit sales tax if their sales in the state exceed $500,000 in a calendar year.

Keeping up with requirements can be challenging, so marketplace facilitators must stay on top of changing nexus laws to remain compliant. This includes monitoring for updates and ensuring their systems properly handle tax collection.

Determining Which Products to Charge Etsy Sales Tax On

In addition to determining your nexus in US states, you’ll also need to decide which products to collect sales tax on. Each state has a list of taxable goods, and depending on the state and product category, some items may be sales tax exempt.

Generally, food, clothing, and textbooks are exempt from sales tax. This means that most Etsy sellers must charge sales tax on their products.

Configuring Etsy for Sales Tax Collection

Setting up sales tax on Etsy can be a multi-step process that requires an understanding of tax laws and how your business works. First, you’ll need to determine whether you need to charge sales tax for your online sales. This will typically hinge on the nature of your products, your business's location, and your customers' jurisdictions. In many cases, speaking with tax authorities or seeking tax advice from a professional is advisable before making an informed decision.

After establishing the need to charge sales tax, you must register with the appropriate tax agencies. This is a crucial step, as it legally enables you to collect sales tax in respective jurisdictions. The registration process varies depending on the state or local tax authority, and it typically involves obtaining a sales tax permit or license. This legal document acknowledges your authority to collect, report, and remit sales tax to relevant authorities.

Once you receive all the necessary state and local registrations, you can configure your Etsy store to collect sales tax. Etsy is responsible for calculating and collecting sales tax, but it’s important to ensure that your store’s settings accurately reflect the tax rates and rules of the jurisdictions where you’re registered to collect tax. 

Initial Setup for Etsy Sales Tax Collection

Your shop must be open to the public to set up sales tax rates on Etsy. Then, you’ll need to add the tax rate and apply it to your listings.

Here’s how to set up sales tax rates, according to Etsy:

1. Once your shop is open, go to Shop Manager>Finances>Payment settings and select the Sales Tax tab.
2. For shops in the US, select a US state, zip code range, or zip code.
3. Enter a sales tax rate in decimal format.
4. Repeat the previous steps for additional locations and tax rates you must collect.
5. Click Save.

After you add all tax rates to your shop, new listings you create will have the tax rate applied by default. You should check all older listings, especially any made before you added in sales tax rates, to ensure they are marked as taxable.

Ety Sales Tax Shipping

With Etsy, all sales tax is based on the shipping location. For example, if you’re in New York and set a tax rate for New York, a California buyer wouldn’t be charged.

In addition, sales tax rates are applied to the area you specify as the most localized. You can set sales tax rates for a US state and specific zip codes.

Best Practices and Sales Tax Compliance Management

As an Etsy store owner, you must keep your store’s sales tax rates and settings up-to-date to maintain compliance with changing tax laws and regulations. Here are the best practices and tools we recommend to help you stay on top of sales tax for your Etsy business:

1. Stay up to date on tax changes. Check for updates on tax regulations in the jurisdictions where you have a tax nexus. Many states have email subscriptions that alert businesses to tax law changes. This is the best way to receive timely updates directly from tax authorities.
2. Use automated tax management tools. While Etsy charges, collects, and remits sales tax on your behalf, it can be worth having an automated sales tax tool to make sure the right amount of money is being remitted to the states. If you have more complex scenarios with your Etsy store, such as dealing with multiple states, consider using third-party compliance apps like Zamp, Avalara, or TaxJar. These apps update tax rates and offer additional compliance features to help you grow your business.
3. Schedule regular tax reviews. Set a schedule to review your tax settings in Etsy at regular intervals — monthly, quarterly, and or bi-annually. Your time cadence should align with your company’s sales patterns and any known periods of tax law changes, such as the beginning of a new fiscal year.
4. Automate tax filing. Some third-party sales tax apps, like Zamp, go beyond calculation to include filing and remitting taxes to the appropriate authorities. Having automated sales tax software can reduce any manual submissions and ensure everything is done accurately and on time.
5. Keep detailed records. With your Etsy storefront, you should maintain records for all transactions, tax calculations, and filings. This not only fulfills a compliance requirement but can also be invaluable in the event of an audit from the IRS or a state’s Department of Revenue.
6. Get advice when you need it. While automated tools can help handle most day-to-day tax scenarios, a tax professional can help if you run into a complex situation or significant change in your business. 

Streamlining Tax Filing Processes

Here are some tips on how you can efficiently streamline your tax reporting and remittance process to reduce errors:

1. Automate the sales tax process. Sales tax software like Zamp can automatically calculate, report, and remit taxes based on sales data, reducing the risk of human error.
2. Consolidate tax reports. You’ll want to ensure all your tax reports are consolidated and easily accessible. The best sales tax software provides dashboard views and downloadable reports that summarize sales tax collected by the state, making it easier to understand and prepare for filings.
3. Regularly update tax records. Ensure your tax records are current by regularly entering new data and reviewing past entries. You’ll want to review regularly to ensure you’re ready to go before each tax deadline.

Preparing for Sales Tax Audits

Being audited by a state can be overwhelming. That’s why you should prepare for a tax audit by diligently keeping records, understanding the specifics of tax laws, and maintaining organized financial statements.

Here are some strategies to implement to ensure you’re well-prepared:

1. Keep accurate records. Maintaining detailed records of all transactions, including invoices, receipts, and tax records, ensures you have all the information you need handy. Sales tax tools can help you stay organized and back up your documents securely.
2. Understand audit triggers. Stay on top of what typically triggers a tax audit in your jurisdiction. This could include discrepancies between reported and actual sales, late filings, and random selections.
3. Regular reviews of tax data. Review your tax filings and compare them against your sales records regularly. Frequent internal audits can help catch inconsistencies before they turn into problems.
4. Consult with tax professionals. Frequent consultations with a tax advisor or professional can help you gain insights into audit trends and new tax compliance obligations.

Staying informed and proactive about sales tax compliance is essential. With e-commerce and multi-state sales, utilize Etsy features as much as possible.

Why Choose Zamp?

If you don’t want to deal with the hassle of sales tax, book a demo with Zamp to see how we can simplify your process. Our in-house team of experts handles the day-to-day management of sales tax for you, so all your concerns are a thing of the past.  Contact our expert team today to get started.

Etsy Sales Tax: FAQ