For many entrepreneurs, Etsy is a simple way to start selling online. There’s no startup cost, no inventory requirements, and there are tons of active buyers who are interested in purchasing what you have available for sale.
But many don’t realize that peddling their wares on sites like Etsy may require various business licenses and permits, depending on the type of business and state — and sometimes the county or municipality — in which you are selling.
Read on to learn about Etsy and if you may need to file for business licenses in your jurisdiction.
Why is Etsy so popular?
Etsy is a website that specializes in handmade physical and digital goods. Anyone can open a seller account with little or no previous retail experience or computer skills.
It’s a global community with 7.7 million active sellers and 95.1 million active buyers. In the first quarter of 2022, they reached nearly $3.3 billion in gross merchandise sales. It’s easy to see why so many makers love to sell on Etsy.
Another advantage of selling on Etsy is that you don’t need to hire someone to create a website for you. A seller simply opens an account and starts uploading product shots and details to open a store.
Many Etsy sellers are focused on making cool products for their customers and don’t consider what they do a business. But some states require you to pay taxes on your Etsy sales, regardless of whether you view it as a hobby or not.
Do you need a business license to sell on Etsy?
Even if you’re only selling on Etsy for fun, the state, county, or municipality you live in may require a business license.
To avoid violations and fines, you’ll want to make sure you research your local laws and regulations as they differ from one region to the next.
Legal considerations for Etsy sellers
Sales and use tax
Many states require Etsy sellers to collect sales tax. Depending on the state where you do business, sales and use tax can be complicated.
Note: In June 2018, the Supreme Court ruled that a state can require online sellers to collect sales tax, even if they do not have a physical presence in that state. Online sellers will have to register for a license and collect and remit sales taxes in all states that impose a sales tax where they satisfy the tax law’s nexus requirement.
In addition to state sales tax, you also may need to collect local sales tax, depending on your local regulations. Visit your state and local government website to find out what the tax landscape for your area looks like.
Physical vs. digital product sales
Tax and business licensing laws do not always apply equally to digital and physical goods. Some states require sales tax collection on physical goods only, while others tax both physical and digital products. Check with your local taxing authority and accountant to determine if you need to collect sales tax from your buyers.
Fictitious business names
Most Etsy sellers come up with unique names for their shops to stand out and let buyers know the types of products they sell. If you sell products under a name other than your own you may need to register a "doing business as" (DBA) with your state or locality, even if you’re not required to be licensed.
Selling food on Etsy
If you’re selling food in your Etsy store, you may need to be certified through your local Health Department to sell online. The U.S. Food and Drug Administration has great resources to help you navigate the various requirements for U.S. sellers. Etsy also offers a seller’s handbook for selling food online.
Hobby vs. for-profit business
Do you have the same business license requirements for your Etsy store if it’s only a hobby?
The short answer: It depends.
The long answer: The IRS requires every penny of income you receive to be reported on your federal tax return whether you do it for fun or for profit. Every state is different, and some may require licenses and others don’t. Check with your state and local taxing authorities to answer this question.
Etsy is a great way to make money from your passion for crafting. While the business side of things can seem a little complicated, don’t be discouraged. Just be sure to follow your local rules and regulations when it comes to licenses, permits, and taxes.
CT Corporation is dedicated to making business easy so you can focus on doing what you love. For more information check out our Business License page or contact us today at (855) 316-8948.