Etsy is an invaluable platform for small business owners. Not only does it facilitate the sales process for business owners, but it gives sellers a large audience of customers who would have otherwise been unavailable.
As a seller on Etsy, you no longer have to figure out the logistics of running a brick-and-mortar shop. However, there are certain aspects that sellers are still required to be knowledgeable about. This includes sales tax.
This article will look at what exactly sales tax is to ensure that you're in compliance with both the government and Etsy, whether Etsy collects the sales tax on behalf of its sellers, and what the sales tax process looks like.

What is Sales Tax?
Sales tax is a tax imposed and collected by state and local governments on the sale of goods and services.
This amount varies by state and locality. For example, the sales tax in California is 7.25%, while in Wyoming, it's 5.36%.
This process can be complicated and time-consuming for online sellers, so sellers must understand the process.
How Does Sales Tax Work?
When a seller makes a sale, they must collect the sales tax from the customer and remit it to the appropriate state and local tax authorities.
This amount is typically charged as a percentage of the retail cost at the point of purchase.

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How Does Sales Tax Work?
On your journey to understanding the sales tax rabbit hole, there are certain terms you need to learn to manage your sales tax obligations.
What is Nexus? – Nexus law is a legal term that refers to state laws that establish when a business /corporation has sufficient connection with a state to be subject to that state's tax laws.
For a long time, businesses were thought to have Nexus within a state if the business had a physical store. However, all that changed in 2017.
If your business has some physical presence(property and payroll) in the state, you probably have Nexus. You should check with the state department of Revenue.
Nexus states: These are states where you do business and meet their threshold for Nexus. This might include :
- Holding physical property
- A state where you have staff
- A state where your suppliers are located
- A state where you may have affiliate partners
- A state where you store inventory
Make a mental note to jot down all the locations that have associations with your business. You'll be better equipped to check for the criteria and eligibility to pay the sales tax.

Origin and Destination basis
Sellers who have Nexus with a state don't necessarily pay that state the tax rate. Some states require you to collect and forward the tax rate based on the product's location.
Some states, however, require that you pay the sales tax rate based on your customers' destination. This will require more admin work. However, you can utilize apps.
Frequently Asked Questions
Does Etsy Charge a Sales Tax?
Etsy doesn't charge sellers a sales tax. The only fees that Etsy charges are listing, processing, and transaction fees.
However, in some instances, it may collect sales tax and remit it on your behalf (the seller) in circumstances where it's obligated.
Does Etsy Collect Sales Tax for Sellers?
Yes, Etsy calculates, collects, and remits sales tax for orders shipped to some states in the US. This is in line with the 2017 marketplace facilitator tax laws.
Suppose a buyer purchases an item on Etsy, and the order is shipped to a state with sales tax laws. In that case, Etsy automatically calculates, collects, and remits the tax to the relevant authorities.
For new listings on the site, the tax rate is applied automatically.
Do I Need to Add Sales Tax to Shipping and Gift-wrapping Services?
In some states, businesses are required to include shipping and gift wrapping in the taxable amount.
Sellers should be aware of the laws of states that they have Nexus to ensure that they are collecting enough tax.
Am I Still Required to Fill Out My Returns?
For the states that Etsy is required to collect and remit taxes on, sellers aren't required to. However, some states require that sellers register and file returns themselves.
In such cases, Etsy will break down the transactions and inform you how much sales tax your business has collected. However, you'll be the one required to do the remitting and filing.
What Do I Need Before I Start Collecting Sales Tax?
Before you can start collecting sales tax, you're required to have a sales tax permit. If sellers are found to be collecting taxes without one, they may be in legal trouble. The process will look very different according to the state that you're in.

Can I Opt Out of Etsy Automatically Collecting Sales Tax?
No. You may not and can not opt out of paying sales tax. This process is automated in areas where Etsy is permitted to collect and remit, and in areas where Etsy isn't obligated, sellers are still unable to opt-out.
An exception to this rule is sellers may choose not to charge tax on specific items. To do this, uncheck the box next to the item's price during the listing.
How Much Sales Tax was Remitted by Etsy for Orders to my Shop?
Etsys sales tax collection depends on several factors, i.e., the shipping location. The system is automated and meant to be easy for sellers.
The total sales tax amount is available in the payment account under your activity tab. Here you'll be able to see the summary. You'll need to download a spreadsheet of your orders for particular orders.
What Happens if a Buyer Pays Straight to my PayPal Account?
Suppose a buyer pays directly into your PayPal account instead of using Etsy payments, and the order meets the criteria for Etsy to remit sales tax on your behalf. In that case, Etsy will include the sales tax amount in your payment.
Afterward, Etsy will deduct the sales tax amount from your Payment account so that the tax can be forwarded to the relevant state.
Which States Don't Levy a Sales Tax
In the US, currently, forty-five states levy a sales tax, except for five states. These are Alaska, Delaware, Montana, Hampshire, and Oregon.

What is the Process for Remitting Sales Tax?
Step one – Establish where you need to charge state sales tax.
Sales tax laws vary from state to state and from city to city. Whether you'll be required to collect sales tax depends on Nexus.
There are some exceptions to whether a business will be required to pay sales tax;
- If the state has no sales tax
- If your only business presence is in one of the states mentioned above
Step two -Research the sales tax laws and rate
Once you've conducted the proper research, you need to figure out the rates you'll be charging for the products shipped to states with a sales tax. You should be aware of the following
- The states sales tax rate
- The cities sales rate tax
- What items you're required to charge a sales tax
- When are you required to file your paperwork, and whats the paperwork
Step three – Register to collect the sales tax
It's illegal to collect sales tax if you're not properly registered. Registration varies from country to country. Some states will ask you to pay a fee, and some won't.
Additionally, some states will require that you renew your permit after some time has passed.
Step four – set up the sales tax rates in your shop. This process is straightforward.
- Go to shop manager> Finances, then to payment settings, and select sales tax.
- If your shop is in the US, select a state, zip code range, or zip code.
- From here, you can set a tax rate for states or individual zip codes. Enter the tax rate (this is in decimal format).
- Add in as many locations as needed and the tax rates. Click save. After applying these steps, any new listings you create will automatically apply the settings by default.
- If you need more help, head to the Etsy help center.
Step five -Pay your sales taxes
After you've followed all the steps, shoppers will be charged tax on orders shipped to the destinations you've inputted.
The total amount transferred to your payment account includes the state sales tax.
Each state has its own rules for when you'll be required to remit it; most of which are quarterly.
However, in some, you might be able to file annually if the amount you owe is less than a certain amount.
In addition, you must check the local laws to ensure you're keeping up with any new changes and when /how you're required to remit the sales tax.
Wrapping Up
Etsy is an excellent marketplace for sellers. However, sellers need to be aware of sales taxes. While the process is automated in some states, for some, it's not, and as such, sellers need to do it manually and input all the necessary data correctly.
Sellers must ensure they comply with all the necessary laws and take advantage of the automation system when possible and talk to a legal professional when in doubt.
Scott Voelker
Over the years I’ve helped thousands of people TAKE ACTION to UNLOCK their true potential on building their ultimate freedom business, by developing the skills to make them resilient, confident and FUTURE PROOF. I’ve clocked my 10,000 hours over the years working in the trenches myself and helping others build and grow their brands. I know the power in TAKING ACTION better than anyone and I’ve seen people lives changed as a result of it...including my OWN!
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