Starting an Etsy Business For Dummies
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Odds are, you need to collect sales tax for the items you sell in your Etsy shop at least some of the time, (Alaska, Delaware, Montana, New Hampshire, and New Jersey are the big exceptions that don't require sales tax.) You also may not need to collect sales tax if you use your Etsy shop to sell prescription drugs (not recommended); agricultural products, such as animal feed or seed; groceries; or products for resale. So when do you need to collect sales tax?

Here's the short answer: You must collect sales tax — sometimes called a franchise tax, a transaction privilege tax, or a use tax, among other aliases — on most goods and some services delivered to a customer who lives in a U.S. state where your business maintains a physical presence, such as a store, office, or employee. So, for example, if you run your Etsy shop from your fifth-floor walkup in Brooklyn, and someone from the state of New York buys something from your shop, you need to hit that person with sales tax. But if your buyer lives in Cali, you're both off the hook (unless your shop is a collective and your partner lives in Long Beach).

In general terms, the sales tax process works like this:

  1. You get a sales tax ID number from your state.

    Check your state government's website for details.

  2. Each time you conduct a taxable transaction, you calculate the tax owed and collect it from the buyer.

  3. You keep excellent records about the tax that you've collected through your Etsy business.

  4. Each month, quarter, or year (depending on your level of sales), you file a tax return and submit the sales tax that you've collected to your state.

  5. You stay out of jail.

So how much sales tax do you need to collect? Ay, there's the rub. 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 make sure that your Etsy shop complies, you absolutely want to research your local laws, and maybe even consult a fancy-pants accountant or attorney for guidance.

Here's the good news: You can set up your Etsy shop to calculate and collect sales tax automatically. That way, when a shopper from your neck of the woods ponies up for one of your items, she's charged the appropriate tax automatically. It's like magic!

The sales tax ID number that you obtain from your state entitles you to buy supplies and other items for your Etsy business wholesale — which is typically at least half off the retail price. Holy bonus, Batman!

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