You’ve been doing crafts for what seems like ages. Maybe your aunt Betsy showed you how to knit when you were five, or your uncle Chuck showed you how to use hand tools to make all kinds of wood figurines. You have been using your talents to make Christmas gifts and birthday gifts for years. The gasps of admiration and the exclamations of “You do such beautiful work” have convinced you to go ahead and start selling your wares online. But where do you sell them? You do some searching around and find out about Etsy. Since they focus on providing a place for crafters to sell their works, you decide to set up an account. You get most of the way through the registration, and they ask you about sales tax. What? You gotta charge sales tax? How do you do that?
First of all, you need to understand the concept of “nexus.” This means that your business must have some connection to a state in order to be required to charge sales tax. Mostly, you have a nexus if you are located there, but nexus test could be met if you sell your wares at a show in another state, or have someone in another state selling goods for you. If you do sell in another state, or have someone selling for you in another state, you will have to collect sales tax for that state, too. Keep in mind that sales tax rules vary from state to state, so if you think you have a presence in another state, do some research on what you need to do to meet those state requirements, as well as the requirements for your own state. (We’ve done it for you! Check out Outright’s “Sales Tax Resources for Outright Sellers in Every State.”
So, how do you add a sales tax rate on Etsy? Here is what you do:
1. Under Your Shop and Shipping & Payment, go to the Sales Tax tab.
2. Now you select the state in the United States, or the Canadian province, or other country. You also have the ability to set specific rates for zip codes or ranges or zip codes within the United States.
3. Enter the tax rate in decimal format. Unfortunately, you can’t yet put it in as a fraction, so 6 3/8% needs to go in as 6.375.
4. If you have any additional jurisdiction’s rates that need to go in, you need to repeat steps two and three for each additional area.
5. To avoid having to do the entire process over again, be sure to click the Save button.
Once you have done these steps, go back and look at the items listed in your shop and make sure that any items that need to have sales tax charged have the apply sales tax box checked. This box is located next to the item’s price box.
Keep in mind that sales tax is charged at the most localized areas that is specified when you entered the rate. So if the lowest level you entered was a city rate, the city rate will be charged. But if you entered a statewide rate, Etsy will use the statewide rate.
As always, if you have questions, don’t hesitate to contact your local CPA. They can help clarify any questions you have on how to charge sales tax.
Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at email@example.com. In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.