How to Handle Ecommerce Sales Tax

In the age of e-commerce, online merchants like Etsy are invaluable business platforms for many small businesses. Platforms like Etsy give countless small businesses access to a wider audience and a simpler sales process.

Selling your goods and services on Etsy means you don’t have to go through the process of setting up your own online store elsewhere. This can make it cheaper and more efficient for you to connect with customers online, although Etsy will receive a portion of the price as a fee for hosting your store.

However, one of the tricky things about selling goods online is ensuring you properly handle your sales tax obligations. This is especially challenging as online merchants’ legal requirements are still changing and depend on ongoing legislative processes in different states.

Since the U.S. Supreme Court’s ruling in the Wayfair Tax case, many states have started passing new laws that impose sales tax requirements on more and more online sales. Other new laws specifically target large sales platforms like Etsy.

Etsy has been working with states to simplify this process, but you need to be cautious and make sure your small business complies with the law.

Does Etsy Add Sales Tax Automatically?

Etsy has been adjusting its process to comply with the law and support its users. Etsy automatically collects and remits state sales tax for many but not all orders.

So far, Etsy has started collecting sales tax for 42 states and the District of Columbia. The platform determines the sales tax required based on the buyer’s shipping address. If the shipping address for a purchase is in one of these states, Etsy adds the tax according to the state’s sales tax rate and remits the tax paid directly to the state authority.

You may be required to file a sales tax return for some of these states, especially in any states where your business has a physical presence. However, you should not need to pay any additional sales tax if that state is one of the states covered by Etsy’s policy.

Determining Where to Charge Etsy Sales Tax

The standard procedure to handle sales tax in the past required determining if your business had a nexus with a particular state. If your business was located in a state or had a significant amount of sales in that state, you would be required to pay sales tax.

Now the requirement has been broadened to a degree. States have been permitted to set their own policies. Requirements vary, but some states like South Dakota require sales tax paid on a purchase if a seller has made $100,000 or has had at least 200 transactions with customers of a given state.

You will definitely need to charge a sales tax in states your company has a presence in, but taxes for other states may depend on the specific state requirements and how much business you have there.

Montana, New Hampshire, Oregon, Alaska, and Delaware do not collect any sales tax at the state level, although towns and cities within these states might collect their own.

Destination-Based and Origin-Based Sales Tax

One of the reasons these taxes are so frustrating to online merchants is because states have competing methods for imposing sales taxes: destination-based or origin-based sales taxes.

Destination-based sales taxes impose taxes on online purchases based on the shipping address. Wherever the product is going, its destination receives the sales tax. The specific tax rate is the tax rate set by the state where the buyer is located. Most states use this model to keep their consumers’ money in their own locality.

Origin-based sales taxes use the seller’s state of origin and the current tax rate set in that area. This means the tax rate depends entirely on where the seller is based.

These conflicting policies leave online merchants with a maze of tax obligations to find their way through, with individual tax rates varying from locality to locality. Some counties and municipalities add their own sales tax on local purchases, complicating things even further for small businesses.

Which Products Need Sales Tax Additions

Sales tax requirements can also vary by specific types of sales. Some products and services are subject to sales tax, and others are not. Tangible products are usually taxed, but many services are not. However, some states are starting to collect sales tax on more and more services.

Sales tax is a mostly state-driven tax, so that it can vary confusingly by state. Digital products like music and videos are sometimes labeled and taxed differently by different states. In some states, they may count as tangible products, while in other states, their status may be closer to a service.

Most wholesale items or other products clearly intended to be resold are usually exempt from sales tax. The assumption is that sales tax will be charged when it is resold.

Many home-consumed items are exempt from sales tax as well. This exempts most grocery items in many states.

Register to Collect Etsy Sales Tax

Where Etsy’s automatic tax remittances are not enough, you can add additional sales tax to your store listings through your Etsy store settings. Once you know your obligations, you can set up custom sales tax rates and remit the extra tax collected to the states involved.

To collect and remit sales tax, you will need to register for a sales tax license or permit. Requirements vary based on the state, but the one thing you’ll definitely need is your federal tax identification number for your business. You can register to get federal and state tax ID numbers online, and you’ll use them whenever you pay taxes at the federal or state level.

You should check with both your local and state taxing authorities to be clear about your requirements for dealing with sales tax in your company’s area of origin.

Consult with a Professional

Beyond the filing requirements in your state of origin, most of your countrywide sales tax obligations will be covered by the Etsy marketplace. However, the laws are changing quickly, and rules can vary depending on the type of products you sell and how much business you have with particular states.

Consult with an accountant to make sure you’re complying with new obligations and taking care of your business. In such a complex and quickly changing legal environment, you need an expert who can help you adapt and protect your business.


1-800Accountant makes small business and personal accounting easy and mobile with its experienced team of professionals and proprietary accounting platform.

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