Sales Tax for Online Businesses: A Primer for Makers
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Selling handmade products online brings a bit of joy to every day. We’re doing what we love AND getting paid for it? So sweet! Unfortunately, it can also be a bit overwhelming to figure out the complex world of sales tax for online businesses.
With so many rules and regulations, it’s hard to know where to begin. Don’t worry – I’ve got you covered! In this blog post, I’ll break down everything you need to know about sales tax, especially if you’re selling on websites like Etsy and Shopify.
Just a quick disclaimer: I am not a tax expert by any means! This post will give you a quick overview. Please contact a CPA or your tax professional to make sure your business is set up correctly.
Disclosure: some of the links below are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.
What is Sales Tax for Online Businesses?
Sales tax is a type of tax that businesses need to collect from customers who purchase goods or services from them. The amount of sales tax varies from state to state, but generally speaking, it’s a percentage of the total sale price of the item being sold. In some states, there may be local taxes that need to be collected as well.
Do I Have To Collect Sales Tax?
Whether or not you have to collect sales tax depends on your business’s location, how much you’re currently selling and where your customers are located. Generally speaking, if you are selling products in states that require businesses to collect sales tax, then yes, you will need to collect it from your customers that are also in your state.
Most states require you to charge sales tax to customers that are also in your state. You would then submit that collected sales tax to your state on a scheduled basis. Check with your CPA or a tax professional if you’re unsure if you need to collect sales tax or if you’re not sure how to do it.
If your business is based in one state but you sell products in another (like most online shops), you may have to register with both states in order to collect sales taxes when necessary.
For example, if your business is based in California but you sell products in New York State (which requires retailers to charge sales taxes), then you will need to register with both California and New York in order for your business to comply with the law.
HOWEVER – most states have a minimum amount threshold that you must hit before you’re required to remit this sales tax. And as small handmade businesses, most of us are not hitting these thresholds.
BUT EVEN SO – you should know about these laws, because if you DO grow your business substantially, you may need to start collecting and remitting sales tax from other states besides your own.
Sales Tax and Online Marketplaces
The good news is that most e-commerce platforms like Etsy and Shopify make it easy for businesses to set up their accounts. These sites can automatically calculate and collect the correct amount of sales tax at checkout.
Etsy also remits sales tax to the states on your behalf. If you sell on Etsy, it’s important to read and understand how they handle sales tax. You can do so here:
As stated above, Etsy will automatically collect AND remit sales tax for you. For Shopify and other online platforms, you can set them up to automatically collect sales tax for you. However, they will not remit the sales tax to the state, you will need to do it.
Remember I talked about thresholds? The threshold of sales varies per state – you can see them here: https://help.shopify.com/en/manual/taxes/us/us-tax-reference#state-tax-reference
And here is a great source for sales tax tips.
Again, most handmade sellers will not meet these thresholds, but it’s good to know the laws and what’s expected.
Bottom line: check to see if your state requires you to remit sales tax for sales made within your state. If you do, go to the state’s small business website. Find out how to remit sales taxes for your state.
What about Shipping Charges?
In most cases shipping charges are not subject to sales taxes. They do not involve the transfer of goods or services between seller and buyer. Shipping charges simply cover the cost of transporting goods.
However, some states may require sellers who offer free shipping or flat rate shipping fees (such as $5 per order) on all orders shipped within their state lines to include these fees when calculating the total sale price of goods subject to sales tax. This is another great question to confirm with your tax advisor.
Sales Tax 101 for Online Craft Businesses
Navigating the world of sales taxes can seem overwhelming at first glance – but don’t worry! Once you understand how it works and take advantage of all the helpful resources available on sites like Etsy and Shopify, handling taxes doesn’t have to be a headache any longer.
If you’re ready to sell more of your product online, I’m here to help! Check out my Craft Business Kickstarter – the blueprint to turning your craft hobby into a viable business. It’s packed with immediate action – choose a business name, get all the legalities down, learn about business banking, and more.
