Confused about Sales Tax and your craft related business? I totally understand!
Sales Tax laws have gotten totally out of control in the last few years. Not many people are talking about HOW those laws impact your handmade, creative, or craft business.
If you’re looking for someone to finally explain Sales Tax and your craft related business, you’ve come to the right place.
I’m here to talk about the unglamorous side of craft business ownership and explain the confusing sales tax stuff that craft business owners need to know, like:
- What caused Sales Tax to become so complicated for small craft businesses?
- Sales Tax Nexus and what it means for your craft business.
- Does every state have Sales Tax?
- Are the handmade items and/or digital products I sell in my craft business taxable?
- Why Sales Tax is so stinking COMPLICATED when it comes to selling.
- Next Steps – How to Handle Sales Tax Overwhelm in your craft business.
Are you ready to get a handle on the confusing world of Sales Tax?
What caused Sales tax to become so complicated for small craft businesses?
Back in June of 2018, the Supreme Court passed a law allowing states (who hadn’t previously done so), to pass laws that required ALL online sellers to collect Sales Tax and remit it to the state where the customer lives. (I wrote a blog post on it back then – Sales Tax, the Supreme Court Decision & your handmade business)
Basically State and local governments, as well as in-state retailers, all kind of got their knickers in a twist.
- People (and businesses) weren’t keeping track of (or paying) Use Tax, the way they were supposed to. Governments (at the state and local level) claimed they were being “unfairly” deprived of sales tax revenue.
- While, in-state retailers felt that they were “losing sales” or having to go out of business because out of state online sellers didn’t have to charge sales tax.
Everyone, including the Supreme Court Justices, were hoping Congress would step up to the plate and implement a nationwide system for sales tax that included a decent exemption for small craft businesses. Here we are 3 years later, everything is still a mess, and there is no decent exemption for small craft businesses like us.
But, just about every state did build in a “small business” exemption for us craft business owners, where out of state/remote online sellers had to:
- have a specific dollar amount in sales
- reach a specific number of sales transactions
- or a combination of the two
Before a small business would have to register, collect, and remit sales tax. But each state has their own laws. And complying is going to be a huge time suck for us.
Sales Tax Nexus and what it means for your craft business
Just so you know, Sales Tax nexus has been around for a long time.
Actually, Sales Tax used to be pretty easy under the old rules (before 2018). Then it was commonly called physical presence nexus. You were required to charge, collect, and remit sales tax on certain items that you sold to customer in your home state, if you were a business.
Let me give you an example:
As a Vermont business, I only had to worry about the items I sold to Vermont customers. If I sold something online to someone in another state – that customer would be responsible for paying Use Tax on the purchase to their home state.
Pretty darned simple, right?
With the new rules (since 2018), physical presence was expanded and economic connection (a new term) was added.
In a nutshell, Sales Tax nexus happens when your business has some sort of connection to another specific state(s). That connection can be either physical, economic, or both.
Physical presence sales tax nexus still includes your home state, but was expanded (in 2018) to include:
- having an office in another state
- an employee that lives in another state
- a contract worker – think of someone you’ve hired to knit, or crochet finished items for you – OR – even a tech editor or a VA that lives in another state
- some sort of warehouse or storage facility that is in another state
- storing inventory – like an Amazon FBA Warehouse or 3rd party fulfilment center that’s in another state
- a 3rd party affiliate that lives in another state
- exhibiting live at a trade show or craft fair in another state
Now, let’s look at what an economic sales tax connection is all about.
An economic connection happens when you sell to and ship items to customers in other states. This type of connection starts when you ship your first item (physical or digital product) to someone in another state.
BUT, you don’t need to start charging, collecting, and remitting sales tax for that state until:
- your sales reach a specific dollar amount
- you have a specific number of transactions (sales shipped)
- or, a combination of the two
Most (but NOT all) states have an exemption of $100,000.00 in sales OR 200+ transactions in the current or previous calendar year.
I hate to say it, but many of us could have both a physical presence and an economic connection to our home state as well as several others.
This means that we need to start keeping track of not only the our total sales but the number of sales we make each month to each state!
Does every state have Sales Tax?
Here’s where Sales Tax tracking become complicated!
- Delaware, New Hampshire, and Oregon have no Sales Tax
- Alaska and Montana have no statewide sales tax, but there are cities and/or towns that do
- the remaining 45 states PLUS Washington DC all have Sales Tax laws
According to the Tax Foundation (and a software company called Vertex, Inc.) at the end of 2020 there were over 11,000 Sales Tax Jurisdictions in the U.S.
NOTE: There are so many Sales Tax Jurisdictions because sales tax can be charged at the State, County, District, and City level.
Are the handmade items and/or digital products I sell in my craft business taxable?
Every state is going to have different rules and you’re going to need to do your homework. Picking up the phone and calling the Tax Department is likely the best place to start.
But here is some basic information.
Handmade items are usually taxable
Handmade items such as pottery, jewelry, knit or crochet items, etc. those items are considered tangible personal property (TPP). TPP is something that can be felt or touched – meaning they have a physical presence.
To give you an idea of how complicated things can get:
- Here in my home state of Vermont, clothing isn’t taxable. So, the hats, fingerless gloves, scarves, etc. that I make are exempt.
- But the amigurumi, dishcloths, and dishtowels that I make are.
What about digital products?
Each state is going to have its own rules and definitions of what they consider to be a digital product.
Let’s start with a general description.
Digital goods are items that are sold, delivered, and transferred in digital form via the internet or email.
Digital goods or products include:
- digital subscriptions
- e-learning courses
- patterns, etc.
As of right now, there are 28 states that tax digital products.
Why Sales Tax is so stinking complicated when it comes to selling
As a craft business owner, when it comes to selling:
- in person at craft fairs, festivals, and markets
- online from your own website
- through Etsy, Ravelry, Love Crafts, etc.
- or even through an online virtual event
To customers in your home state or other states – Sales Tax rates and laws vary by state.
Let’s see if I can break it down for you:
- You ALWAYS need to register, collect & pay sales tax to your home state
- This may apply to physical finished items and/or digital goods
- If you sell in person at a craft fair in your home state, you charge the sales tax rate based on where the event is taking place – there may be a COMBINED State, County, and Local Sales Tax
- When selling on-line (through your own website) to customers in your state, sales tax is based on the shipping address of the buyer. Remember, there may be a COMBINED State, County, and Local Sales Tax.
- If you pay people living in other states (like a VA, tech editor, affiliates, contract knitters or crocheters) you now have a “physical presence” in that state as well and need to register, collect, and remit sales tax to those states (just like your home state).
- When you exhibit (at a live event) in another state, you MIGHT need to register, collect & pay sales tax to that state. Even though it would be on a temporary basis.
- Let’s say you sell to people in other states from your website. With these new laws you can be required to register, collect, and pay sales tax to those other states. Each state has some sort of “exemption or threshold” for small businesses – either a specific dollar amount of sales or a specific number of sales (transactions) for the current or previous year.
- Every state will have a different idea on what is or isn’t taxable for finished items.
- Each state will have a different definition of what they consider to be digital goods.
- If you sell through a Marketplace – SOME of them will handle the collection and remittance of sales tax on your behalf – IF you set things up correctly.
Next Step – How to handle the Sales Tax overwhelm in your craft business!
Congratulations if you’ve read this entire post! By now you’ve realized that Sales Tax isn’t a walk in the park.
You’ve learned about what craft business owners need to know about Sales Tax, including:
- What caused Sales Tax to become so complicated
- About Sales Tax Nexus and what it means
- What states do and do not have Sales Tax Laws
- Whether or not your handmade items and/or digital products are taxable
- Why Sales Tax is so stinking COMPLICATED, when it comes to selling