Do I Have to Charge Sales Tax on Handmade Items?

As a creator of handmade items, transitioning from a hobby to a business venture introduces new responsibilities, one of which is navigating the world of sales tax. Sales tax is a consumption tax applied to the sale of goods and services, collected by sellers and paid to state and local governments. The obligation to charge this tax is not determined by your items being handmade, but by a specific set of rules connecting your business to a state.

Determining Your Sales Tax Obligation

Your responsibility to collect sales tax hinges on a concept called “nexus,” which is a connection between your business and a state that obligates you to register, collect, and remit its sales tax. The fact that your products are handmade does not provide an exemption; most handmade goods are considered tangible personal property, which is taxable in most states. Your tax duty is triggered by having nexus, which can be established in two primary ways.

A primary way to establish this connection is through a physical presence, creating what is known as a “physical nexus.” For a handmade business, this is established in your home state by operating out of a home studio or storing inventory. Attending a craft fair, even for a single weekend, can also create a physical nexus in that state. Other activities that establish a physical presence include owning a warehouse, having an office, or hiring an employee who works within a state’s borders.

The second form of connection is “economic nexus,” established by the Supreme Court’s decision in South Dakota v. Wayfair, Inc. This type of nexus is created when your sales into a state exceed a certain threshold, even if you have no physical presence there. While these thresholds vary, a common benchmark is $100,000 in gross sales within a year. Many states have simplified their rules by removing a separate transaction-count threshold. As an online seller, you must monitor your sales into different states to determine if you cross these economic thresholds, which would require you to start collecting tax.

Registering to Collect Sales Tax

Once you determine that your business has nexus in a state, you must register for a sales tax permit before you can legally collect tax from customers. This permit is the official authorization from a state’s tax agency that allows you to act as a tax collection agent on its behalf. Collecting sales tax without first securing a permit is unlawful, so this step is a prerequisite to becoming compliant.

To complete the application, you will need to provide specific details about your business. This includes:

• Your official business name and address, along with your federal Employer Identification Number (EIN) if you have one. Sole proprietors can typically use their Social Security Number.
• Your business structure, such as a sole proprietorship or a limited liability company (LLC).
• The date your business operations began or will begin in that state.
• The names and addresses of the business owners or officers.
• A North American Industry Classification System (NAICS) code that best describes your business, such as those for manufacturing or independent artists.

The Process of Collecting and Remitting Sales Tax

After securing a permit, the next step is calculating, collecting, and remitting the tax. The correct tax rate can depend on whether a state is “origin-based” or “destination-based.” In origin-based states, you charge the tax rate effective at your location, while in destination-based states, you charge the rate at your customer’s shipping address. Most sellers use automated tax calculators provided by e-commerce platforms or payment processors to manage this complexity.

The collection method depends on where the sale occurs. For sales on major online platforms, Marketplace Facilitator Laws shift the responsibility of tax collection and remittance from the individual seller to the marketplace itself. This means that for sales you make through sites like Etsy or Amazon Handmade, the platform will automatically calculate, collect, and send the sales tax to the proper state authorities on your behalf.

You retain the responsibility for sales made through your own website or at in-person events. If you use an e-commerce platform like Shopify or Squarespace for your personal site, you must configure the tax settings to collect the correct rates. For in-person sales at markets or fairs, point-of-sale systems like Square can be set up to apply the appropriate local tax rate.

Finally, you must file sales tax returns with each state where you hold a permit and remit the taxes you have collected. The frequency of these filings—monthly, quarterly, or annually—is determined by the state based on your sales volume. The filing process involves reporting your total sales, taxable sales, and the amount of sales tax collected before sending the funds to the state.