Accounting for Etsy sales tax
While we have alluded to this in other posts, a question from a customer reminded us that we could be more explicit about sales tax and Etsy.
In a nutshell, as a marketplace facilitator, Etsy takes on the responsibility of both collecting sales tax from buyers and remitting it to the state. But, those amounts do show up in your Etsy transactions. So how does one account for them?
Sales tax is a liability…not income or expense
When sales tax is collected from a customer, it is not considered income. It becomes a “liability”, accounting jargon for “owing money to someone else.” In this case, it is money owed to the state. And that is how Seller Ledger treats the sales tax that is collected. It becomes money you owe to the state. When Etsy remits that money to the state, the “liability” gets offset.
This means that sales tax will not impact your profit and loss total, which determines your income tax owed.
How Etsy reports sales tax
Here’s where it gets a bit interesting. Other marketplaces, like eBay and Amazon, indicate that sales tax is both collected and remitted on the order. In those cases, Seller Ledger creates entries for both the sales tax collected and the sales tax paid, right in the order itself. That means that sales tax does not impact the order total, because anything collected is also subtracted out.
Etsy, on the other hand, includes sales tax in the total order amount. For example, if you click into your Etsy account from your Seller Ledger dashboard, and expand an order where sales tax was collected, you’ll see something like the following:
Notice that the total amount of the order includes the sales tax collected.
It turns our that Etsy then provides a separate transaction for the sales tax remitted. As you can see above this order, there is a separate remittance transaction for the same amount.
As we mentioned before, this doesn’t impact your profit and loss one way of the other. But it can make it harder to reconcile numbers from different places, especially when 1099s come out. And if you’re interesting in more potentials sources of confusion on Etsy numbers, check out this post.