Do I Have to Collect Sales Tax for a Hobby?

Earning money from a hobby can be exciting, but it also raises tax questions—particularly whether sales tax needs to be collected. Many assume that because their activity is not a formal business, they are exempt. However, tax laws don’t always distinguish between hobbies and businesses in intuitive ways.

Understanding when sales tax applies depends on factors such as where sales occur, revenue generated, and the platforms used. Failing to comply can lead to penalties, even for small-scale sellers.

Hobby Classification Criteria

Determining whether an activity is a hobby or a business is not always straightforward. The IRS evaluates several factors, with one of the most important being intent to make a profit. If you consistently generate income and reinvest with long-term financial goals, your activity may be classified as a business.

Sales frequency and structure also matter. Selling handmade crafts occasionally at local fairs is more likely to be considered a hobby, while regularly listing products online, advertising, or maintaining structured sales processes suggests a business. The IRS also considers whether the income is relied upon for expenses or supplemental.

Recordkeeping habits can further indicate classification. Businesses typically maintain detailed records of costs, inventory, and revenue, while hobbyists may not. Claiming deductions for materials, shipping, or other expenses can signal a business operation. Prior success in similar ventures is another factor—if you’ve previously run a profitable business in the same field, the IRS may assume similar intent.

Nexus Considerations

Even if an activity is classified as a hobby, sales tax obligations may still apply depending on where and how sales occur. “Nexus” determines whether a seller has a sufficient connection to a state requiring tax collection. Nexus can be established through physical presence, economic activity, or third-party platforms facilitating sales.

Physical Location

Having a physical presence in a state generally creates a sales tax obligation. This includes operating from home, renting a booth at craft fairs, or storing inventory in a warehouse. For example, a hobbyist selling handmade jewelry from their home in Texas must collect Texas sales tax on sales to Texas residents. Some states also consider temporary presence, such as attending trade shows or pop-up markets, as establishing nexus.

Each state has its own nexus rules. In California, any in-state sales location, even temporary, can trigger tax requirements. New York considers in-state inventory storage sufficient to establish nexus. Hobbyists selling at events in multiple states should check each state’s tax laws to determine if they need a sales tax permit.

Economic Thresholds

Many states enforce economic nexus laws, requiring sellers to collect sales tax if they exceed a revenue or transaction threshold, even without a physical presence. These laws became widespread after the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require remote sellers to collect sales tax based on sales volume.

Thresholds vary by state but commonly range from $100,000 to $500,000 in annual sales or 200 transactions. For example, Illinois requires tax collection if a seller generates more than $100,000 in gross revenue or completes 200 transactions with Illinois customers in a year. Some states, such as Kansas, have no minimum threshold, meaning any sale to a Kansas resident could require tax collection.

Hobbyists selling online should monitor sales volume, as exceeding these limits triggers compliance requirements.

Third-Party Platforms

Selling through online marketplaces like Etsy, eBay, or Amazon introduces additional tax considerations. Many states have marketplace facilitator laws, requiring platforms to collect and remit sales tax on behalf of sellers. This simplifies compliance for hobbyists, as they may not need to register for a sales tax permit if all sales occur through a marketplace that handles tax collection.

For example, Etsy automatically collects and remits sales tax for orders shipped to states with marketplace facilitator laws, such as California, Florida, and Texas. However, this does not eliminate all tax responsibilities. If a hobbyist sells both through Etsy and directly via a personal website, they may still need to collect and remit tax on non-marketplace sales.

Some states require sellers to report marketplace sales even if tax is collected by the platform. Washington, for instance, mandates that sellers include marketplace sales in tax filings. Hobbyists using multiple sales channels should review state-specific rules to ensure compliance.

Recordkeeping Essentials

Accurate recordkeeping is necessary for tracking sales tax obligations and ensuring compliance. Even if an activity is considered a hobby, maintaining organized financial records helps avoid discrepancies and reduces the risk of penalties.

Detailed sales records are essential, including transaction dates, amounts, customer locations, and any sales tax collected. Many states require separate reporting of taxable and non-taxable sales, so keeping itemized records ensures accuracy. Software like QuickBooks, Wave, or spreadsheets can help log transactions and generate reports. Consolidating data from multiple platforms prevents underreporting or duplication errors.

Expense tracking is also important, as some costs may be deductible if the activity transitions into a business. Documenting material costs, shipping fees, payment processing charges, and other expenses provides insight into profitability and supports accurate tax reporting. Retaining receipts and invoices for at least three years aligns with IRS audit guidelines, though some states require longer retention for sales tax records. Digital storage solutions like cloud accounting software can help keep records organized.

Sales tax compliance often involves periodic filings, and missing deadlines can result in penalties. States have different filing frequencies—monthly, quarterly, or annually—depending on sales volume. Setting reminders or using automated tax software ensures timely submissions. Some states, such as Florida, impose late penalties of 10% of the unpaid tax, while California charges a minimum penalty of $10 for late filings, with additional interest accruing over time.

Possible Exemptions

Certain sales tax exemptions may apply depending on the type of goods sold, the buyer’s status, or specific state laws. Some states provide exemptions for casual or occasional sales, meaning sellers who make infrequent transactions may not need to collect sales tax. For example, in Pennsylvania, individuals making isolated sales of tangible property are not considered vendors for sales tax purposes, provided they do not engage in repeated transactions resembling a business. Similarly, California’s “occasional sales” exemption applies when a seller makes no more than two sales in a 12-month period, excluding inventory liquidations.

The nature of the goods sold can also determine taxability. Some categories, such as groceries, prescription medications, and certain clothing items, are exempt in various states. In New Jersey, most clothing and footwear are tax-exempt, so a hobbyist selling handmade scarves or sweaters could be exempt. However, exemptions often depend on specific conditions—while food is generally tax-exempt, prepared meals or catering services typically do not qualify.

Sales to tax-exempt organizations or resellers may also qualify for exemptions. Nonprofit entities, such as charities or religious organizations, often provide exemption certificates that sellers must retain as proof of tax-exempt sales. For example, a hobbyist selling handcrafted decorations to a registered 501(c)(3) organization in Texas would not need to collect sales tax if the buyer provides a valid exemption certificate. Additionally, sales for resale are typically exempt when the buyer presents a resale certificate, as the tax will be collected at the final point of sale.

Consequences of Non-Compliance

Failing to collect and remit sales tax when required can lead to financial penalties, interest charges, and legal consequences. Many states audit small sellers, including hobbyists, to ensure compliance. If a seller is found to owe tax, they may be required to pay back taxes, along with fines. Some states impose penalties as high as 25% of the unpaid tax, and interest accrues until the balance is settled.

Beyond financial penalties, non-compliance can result in administrative burdens. States may revoke sales tax permits, issue liens against assets, or require sellers to undergo audits that demand extensive documentation. In extreme cases, sellers could face misdemeanor or felony charges, depending on the amount owed and intent behind non-compliance. To avoid these risks, sellers should regularly review state tax laws, maintain accurate records, and seek professional guidance if unsure about their obligations.