Tax Tips: Everything You Need to Know About Sales Tax

Outright.com is back on the blog with straightforward tips on simplifying your accounting and putting the focus back on the creative. (Note: This info may only apply to U.S. sellers.)

When archaeologists dug out the ancient tombs of Egypt, they found marvelous artifacts like mummies and finely wrought jewelry; they also uncovered paintings of — no joke — sales tax collectors. It turns out that sales taxes on commodities such as cooking oil have been around ever since there were governing bodies to collect them.

These days, 45 U.S. states and the District of Columbia assess sales tax. If you’re an Etsy seller and you live in one of the states that require sales tax collection, this article will explain the fundamentals for you. For those who live in Alaska, Delaware, Montana, New Hampshire or Oregon ­— lucky you, you get a pass!

When Do I Collect Sales Tax?

Online sellers with “nexus” (legalese for “a physical presence” such as a store, office or employee) in a state or district with sales tax laws are required to collect on items sold and delivered within their state. In other words, if you run your business out of Virginia and someone from Virginia orders an item from you, then you are required to charge them sales tax. Sales tax rates levied by U.S. states are generally between 5-7%.

Sadly, you can’t just look up your state’s sales tax rate and call it a day. Cities, counties, municipalities, parishes and other smaller units within states are also able to levy sales tax, and according to the National Retail Federation, 7,500 jurisdictions (not including states) impose some kind of sales tax. These can run another 1-2% of the price of an item.

Note that most states allow you to collect sales tax at your local rate, not the local rate of the buyer. This means that you do not have to look up the local sales tax for every in-state buyer who makes a purchase from your store. So if you live in San Francisco, but sell to someone in San Jose, San Diego or San Jacinto, you can still charge sales tax at your local rate.

Some states though, like Washington, require sellers to charge buyers the buyer’s local tax rate. This means collecting very accurate address information and then figuring out the total amount of tax due based on where your buyer lives.

Fortunately, Etsy’s new Checkout process gives sellers a one-time, simple way to calculate and set up their sales tax collection down to the zip code. Just go to Sales Tax under Your Etsy and enter the rates for each U.S. state or zip code, Canadian province, or country where you would like to charge sales tax. When a shopper from that area buys from you, sales tax will automatically be charged. Find step-by-step instructions on setting up your Etsy sales tax collection in the Help section.

I’ve Collected All This Sales Tax. Now What?

It is your responsibility as an Etsy shop owner to report and remit the sales tax you’ve collected to the appropriate taxing authority. And every state collects in a different way. For instance, in California, state sales taxes are collected by the State Board of Equalization, which also issues mandatory sellers permits (required for sellers who sell tangible goods, such as Etsy sellers). To find out who administers sales tax in your state — and what you need to do to stay legal – find your state guide at Outright.

A note of caution: some sellers play it safe and collect just a little bit extra when it comes to things like shipping. (Etsy’s Sales Tax settings allow you to choose whether to apply tax to shipping and handling.) Resist the urge to collect extra sales tax! According to state law, any extra sales tax you collect belongs to them, too. Don’t ask us why — it’s the law. You’re doing yourself and your buyers a favor when you figure out sales tax right down to the nearest penny, and not a penny more.

And when this all feels a little overwhelming, just remember the basics: charge the right amount and keep track. You are participating in a tradition that is as old as the pyramids!

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