Occupational Therapist Guide to Starting an ETSY Shop & Sales Tax

This guide does not offer a substitute for professional legal or tax advice. If you have questions about your tax liability or concerns about compliance, please consult your qualified legal, tax, or accounting professional.

 

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Should you start an Etsy shop?

Statistics

  • Etsy’s annual revenue in 2019: 818.79m USD
  • Etsy’s annual marketplace revenue in 2019: 593.65m USD
  • Etsy’s annual net income in 2019: 95.89m USD

Although these numbers are not as large as Amazon’s, there are many benefits to selling your products – especially your handmade products on Etsy.

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Benefits of Etsy

The reasons we like Etsy as our preferred Channel for our products are:

  • A large user base that brings awareness to your listings without the need to advertise your website or pay for third party advertising.
  • Quick and easy account registration. Registering literally takes just a couple minutes and you could be listing your first item immediately after. By comparison, Amazon’s verification is more involved and may require a driver’s license, a postcard mailed to a physical address with a verification code, and a longer turn around time.
  • Intuitive user interface with an easy learning curve.
  • Powerful listing management tools that allow you to easily change multiple listing descriptions, prices, etc.
  • Easily run a sale, promotion, or give discount codes.
  • Ability to run ads on Etsy for as little as $1/day, up to $20/day without knowledge of advertising technicals (e.g. Google Ads).
  • Set a bot to follow up with leads to automatically send discounts for ‘cart abandonment’ or ‘favorited items’ to complete the sale.
  • Upload multiple photos and link them to colorways or different styles for the same listing name. e.g, OT t-shirt in (1)blue, (2)green, (3)red – all under 1 listing.
  • $0.20/listing fee – can enable auto-renew when listing is sold.
  • Automatic sales tax calculation, collection, and remitting for most states.

Etsy vs. Others

You have many options when it comes to selling products online. Amazon may come to mind first. However, the process of registering is more involved. Amazon has gotten popular due to its convenience and efficiency. However, this means that you, as a seller, must also be responsive to customer questions and efficient by shipping within a few days. Your refund policy must also meet or exceed Amazon’s own A-Z policy.

Etsy allows you more freedom and additional time because the image of Etsy is handmade items. This decreases the stress involved in your first e-commerce venture. Another downside to Amazon is if you decide to use FBA (Fulfillment by Amazon), which allows Amazon to stock and manage your inventory in their warehouses, you could trigger a complicated sales tax liability. The fees for FBA are also higher than selling directly from your inventory with Etsy.

otdude woocommerce store
OTDUDE.com Store runs on WooCommerce

Another popular option if you have a WordPress Blog/Website is to install WooCommerce. OTDUDE uses WooCommerce to power its shop as well. You’ll need to have (1) a domain name (2) a web host (3) WordPress installed. To get the most out of your WooCommerce store, you may need to purchase additional plugins and licenses. Another downside is WooCommerce is that it is less intuitive when it comes to editing multiple products at a time. Etsy is more powerful and allows you to edit many aspects including price, description, SKU, item details, and much more. WooCommerce requires more experimentation before launching your actual Store, including testing of how the theme looks on different devices, product image quality, and setting up point of sale systems to accept payment, e.g. credit cards. WooCommerce does result in lower fees and the most control over your store. However, the sales tax implications may not be worth all the trouble. You will also need to advertise your WooCommerce store to bring in traffic (additional cost) or promote on social media (additional time).

Shopify Features List

Shopify is gaining a lot of attention for its intuitive and easy to use features. However, there is a monthly cost to use Shopify. Users may also have to pay for addons. For example, a popular banner message addon that displays on the top of your Shop costs an additional $5.00 a month. Another major downside to using Shopify is building brand awareness and your need to promote your Store either via social media and/or paid advertising like you do with WooCommerce. Etsy already has an established userbase that will use the Etsy search box.

The Complicated World of Sales Tax

There are many factors to consider when choosing a platform to start your e-commerce site. We outlined some pros and cons of Amazon, WooCommerce, and Shopify compared to Etsy. For online sellers, sales tax is one of the most complicated issues to deal with. When you have a brick and mortar store, you collect sales tax for the state (and county, city) in which it resides. Simple. Not so with online shops. You may remember not having to pay sales tax at one point when buying from Amazon. Many states have lost a lot of money from sellers not collecting sales tax and buyers not paying use tax. This all changed in 2018 with South Dakota vs. Wayfair decision by the Supreme Court. Therefore, the platform you choose should be a major consideration and may even be a dealbreaker for you – especially if you are new to how sales tax works as a new business owner. You should be aware of this because it could result in hefty fines, penalties, and risk of losing personal assets. It’s important to note that most states also allow cities, counties, and special taxing districts to charge a sales tax (in addition to the state). So you may be responsible for collecting more than simply state sales tax.

Let’s familiarize ourselves with the concept of Nexus.

Sales tax nexus occurs when your business has some kind of connection to a state.

An entity may have “nexus” if they meet certain criteria. There are many (more than 2) types of nexus. Two types to consider are:

Physical Nexus: if you have a physical presence, e.g. a storefront, office, warehouse – then you have physical nexus in that State. You are obligated to register in that state for a seller’s permit, collect sales tax on the State’s behalf, file the financials, and, remit the money to the state. At a minimum, even Etsy sellers need to be aware of physical nexus for their state.

Economic Nexus: this is a newer concept and process that is becoming more relevant for online e-commerce sellers. According to Avalara, “Prior to this ruling, states could only enforce a tax collection obligation on businesses that had a physical presence in the state, such as a brick-and-mortar location or remote employees. While the physical presence standard still exists, nexus laws were expanded to include a sales tax obligation based on a certain level of economic activity within the state, including sales revenue, transaction volume, or a combination of both. Like many sales tax laws, economic nexus criteria vary by state and by the type of tax.”

USA Economic Nexus
Economic Nexus Laws by State. Source: taxjar.com

What does this mean? If you sell your products to a buyer in another state, you have to start keeping track of both the number of sales and quantity of sales because once you meet the specific state’s threshold, you then become obligated to calculate, collect, file, and remit sales tax to that state. If you were to do this manually, it would be a lot of time spent. Otherwise, you would have to install third-party software or hire help.

This is still an evolving situation with many states, even local counties having their own specific laws to make matters more complicated.

These laws began to appear in 2017, shortly after states realized that while Amazon had started taxing sales of its own products, it wasn’t charging sales tax on third-party, or marketplace, sales. Given that more than half of all Amazon transactions occur through its marketplace, a significant portion of sales were going untaxed.

Sales tax has become a little less complicated with the implementation of marketplace facilitators. According to Avalara, “Marketplace facilitator laws impose an obligation on the marketplace facilitator to collect and remit sales tax on behalf of marketplace sellers. These laws are significant because they shift the obligation to collect and remit sales tax from the seller to the platform that facilitates the sale (the marketplace facilitator).” However, states vary in their interpretation and specifics for marketplace facilitators. In other words, just because channels such as Amazon and Etsy are classified as marketplace facilitators does not that mean that it applies to all 50 states.

Channels such as Etsy that are marketplace facilitators automatically handle taxes for states that require them to, but not the remaining ones.

Amazon: As the marketplace facilitator, Amazon will now be responsible to calculate, collect, remit, and refund state sales tax on sales sold by third-party sellers for transactions destined to states where Marketplace Facilitator and/or Marketplace collection legislation is enacted.

According to Avalara, “sellers should be careful to keep their books in order and log all sales, sales tax collected, receipts, returns, and any tax-exempt purchases in case of an audit.” FBA will likely trigger more complicated tax issues than FBM (fulfillment by merchant). Why? Amazon FBA sellers may have sales tax nexus in a state simply from storing their FBA inventory in an Amazon fulfillment center. By nature of Amazon being efficient, they will move your inventory at will and redistribute your inventory to different states, thereby increasing your presence and physical nexus responsibility.

Shopify: Doesn’t file or remit your sales taxes for you. You might need to register your business with your local or federal tax authority to handle your sales tax. The calculations and reports that Shopify provides should help make things easier when it’s time to file and pay your taxes. You should always check with a local tax authority or a tax accountant to make sure that you charge your customers the correct sales tax rates, and to make sure you file and remit the taxes correctly.

WooCommerce: can automatically collect sales tax under physical nexus, but it does not seem to factor in economic nexus. There are 3rd party plugins by Avalara and Taxjar that achieve this, but at an additional cost. As a new and small seller, this could eat at your bottom-line and overall profits. Avalara does offer a free plugin and trial and starts at $50/year for the plugin, but automatic filing will be an additional cost as well.

How Etsy Handles Sales Tax

As of this writing, Etsy automatically handles the bulk of the sales tax process:

“We are currently calculating, collecting, and remitting state sales tax on all orders shipped to the following states. In response to new laws passed in these states, we started or will start collecting and remitting state sales tax on orders shipped to these states on the dates listed below.”

“Etsy calculates the state sales tax rate (they can vary from location to location, and item to item) for the shipping address, charges the buyer, and sends the tax owed to the state. For orders placed through standalone PayPal, the sales tax collected is sent to you as a part of the payment. Then, Etsy will add the sales tax amount to your Etsy bill so that we can remit the tax to the state. If you’ve made sales to these states since these changes went into effect, we’ve got it covered—Etsy has collected and remitted any sales tax owed. If you are required to file a sales tax return in these states, you do not need to report sales tax on Etsy sales; all you need to do is state that the sales were made through Etsy.”

You can read more from Etsy.

Your Sales Tax Responsibility with Etsy

“If you have a physical presence in a state where Etsy collects and remits state sales tax on your behalf, you may still be required to file a state sales tax return to that state. However, you will not have to remit any tax collected on your sales made through Etsy because we will remit these funds on your behalf.”

Keep in mind that Etsy does not cover your sales tax for all 50 states.

Conclusion

So we can see, Etsy helps out micro-businesses such OTDUDE.com by simplifying many aspects – including tax-related issues. You save a lot of money not only on sales tax consultation and services, but on advertising and software licensing as well. Since Etsy has a large customer base, your store can start making sales right away without having to build a following or having many five star reviews like you do on Amazon. Every business owner has some tax responsibility, but with Etsy, you have much less to worry about so that you can focus on running your store.

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Ready to get started?

Get 40 Free Etsy Listings

Use this referral link to register your first Etsy shop and we both get 40 free listings to start selling right away.

Once you get your Etsy Shop going, then you may consider expanding to Amazon, Shopify, or your own WooCommerce Store.

Additional Reading on Sales Tax

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