How to Collect Sales Tax on Etsy Sales
You need to collect sales tax at least some of the time on your Etsy sales (unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon — five states that don't impose a statewide sales tax). Specifically, you must collect sales tax on most goods and some services delivered to a customer who lives in a U.S. state where your business maintains a physical presence, or nexus.
For example, if you run your Etsy shop from a barn in Bangor, and someone from the great state of Maine buys something from your shop, you need to hit that person with sales tax. If, however, your buyer lives in Boston, you're both off the hook.
Sales tax rates vary widely from state to state. Plus, some cities, counties, and jurisdictions impose sales tax above and beyond the state rate. To get a handle on your state's requirements, check out Sales Tax Resources for Online Sellers in Every State from Outright. It provides links to information about each state's tax requirements, including whether you're required to charge a sales tax; what sales tax rate(s) you must charge; how to register with your state for a sales tax license or permit; and where, when, and how to remit sales tax you've collected to your state.
You can set up Etsy to automatically collect sales tax during the checkout process. When you do, Etsy automatically assesses a sales tax for buyers in the region you specify. To access these settings, click the Your Shop link along the top of any Etsy page, click the Shipping & Payment link under Shop Settings on the left side of the page, and click the Sales Tax tab.
To help keep track of taxes you collect, you can use a free app by Outright. This app connects directly to your Etsy account, downloads your transactions automatically on a nightly basis, and spits out reports that tell you how much sales tax you've collected. All that's left for you to do is cut the check to your state's tax collector when the money comes due!