Your studio is your business’s home base, whether you sell out of a spare room or a brick-and-mortar store. Depending on your activities, you might be responsible for collecting and paying state sales tax to the state where your business has a physical presence.
States collect sales tax, a percentage of the total purchase price, on purchases made in the state. Since you run an online business with customers around the corner or across the country, you’ll need to follow state sales tax laws for the states you ship to. Follow these steps to get started.
Step 1: Determine where you need to charge state sales tax
While most states impose sales tax, the rates and rules can vary from state to state, and even from city to city within a specific state. Whether or not you need to collect state sales tax is determined by a concept called “nexus” which means your business has some degree of physical presence in the state. You can think of a physical presence in two ways: property and payroll. If you operate out of your home, rent studio space, or rent space in a warehouse or shipping facility you likely have nexus in that state. If you have an out-of-state employee, that might also give you nexus in their home state. For clarification about what qualifies as nexus in a given state, contact that state's Department of Revenue.
You generally collect sales tax for the state you conduct business in on orders that are placed within or delivered to a location within that same state. So if your studio is in Houston, and you’re shipping to a customer in Austin, you’ll be expected to collect state sales tax on that order and pay it to the state of Texas. If you’re shipping and order from Houston to Atlanta, it’s unlikely that you’ll need to collect state sales tax.
Special cases
Generally you’re required to collect state sales tax on orders to states where your business has a physical presence, but there are some exceptions.
- States with no sales tax
- If your only business presence is in one of these states, you don’t need to worry about collecting state sales tax (even if you sell to customers outside your state): As of January 2018, Alaska, Delaware, Montana, New Hampshire, and Oregon have opted out of charging state sales tax.
- Local tax laws
- State sales tax laws can get more complicated when local tax laws are added into the mix. Individual cities and zip codes can set tax rates that differ from the state tax rate. For example, New York City’s sales tax rate is 4.5%, which you need to add on top of the New York state sales tax rate of 4%. If you live in New York State, you’ll need to set up a tax rate for each zip code where you might owe tax (see below for more information about setting up rates in your Etsy shop).
- State sales tax on marketplaces
- As an online marketplace, Etsy automatically calculates, collects, and remits state sales tax on orders shipped to some states. Learn more.
Step 2: Research the state sales tax laws and rate
Once you’ve identified the states where your business might have nexus, it’s time to determine the tax rates you should charge to orders shipped to shoppers in those states. A quick online search for the state and “sales tax laws” should bring you to a .gov site that will be able to tell you:
- The state sales tax rate
- Any city sales tax rates
- Which items you’re required to charge sales tax on
- Additional details like when your sales tax is due to the state and what kind of paperwork you’ll need to submit
The Federation of Tax Authorities also publishes a list of the tax authorities in each state.
Generally, you’ll be required to collect state sales tax on most, but not all, physical goods you sell. Goods that are exempt from sales tax may include food and children’s clothing. However, each state has a unique list of taxable goods, so be sure to check your state’s tax rules to see if your products fall into an tax exempt category.
Step 3: Register to collect state sale tax
In some states, you’re required to obtain a sales tax permit to collect state sales tax. Find information about each state's sales tax permit on the state's Department of Revenue website—for example, if you live in Michigan, that info is here. Some states will charge a fee to apply for a sales tax permit and will require you to renew your sales tax permit after a certain amount of time.
You’ll usually need your taxpayer identification number such as a social security number or federal employer identification number (EIN) to register with a state or city to collect sales tax for your Etsy business.
Step 4: Set up state sales tax rates in your Etsy shop
After doing your research you should be armed with the information you need to answer these questions:
- Which states am I required to charge sales tax in?
- What is the rate for each of those states?
Now you’re ready to set up sales tax in your shop. Go to Shop Manager > Finances > Payment settings to select Sales Tax. You can set a tax rate for entire states, or individual zip codes if your state has local sales tax. Set up taxes for all locations where you’re required to collect sales tax, and then click Save. Find step-by-step instructions on how to collect sales tax for your Etsy shop in Etsy’s Help Center.
Step 5: Pay your state sales tax
Once you’ve set up your sales tax rates, shoppers will be charged state sales tax on orders shipped to those destinations. State sales tax is included in the total amount transferred to your payment account. Each state has its own rules about when sales tax you’ve collected is due. Most are quarterly, though in some states you might be able to file annually if the total amount of sales tax you owe is less than a certain amount.
You can see how much sales tax you’ve collected on Etsy (that is owed to the state or city) by downloading the CSV file of your sales. Get step-by-step instructions for downloading the CSV. You can submit your return through the mail or online through the relevant state's Department of Revenue.
QuickBooks can help you keep track of the sales tax you’ve paid to each state. Sign-up today to start organizing your business finances. Learn more.
Please note that tax laws change frequently, and this information is not tax advice or legal advice. You’re responsible for any use of this information. Please consult an attorney or tax expert if you have any questions.
Continue reading > Chapter 5: 4 Tips for a More Organized Tax Season
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