Last Updated on January 13, 2020
Question – I am starting a business selling handmade items at craft fairs and flea markets, in addition to online with Etsy. Can you tell me if I need a tax id number or EIN?
Our Answer – First off, people sometimes confuse a tax id number (sometimes referred to as a taxpayer identification number) and EIN (known as an Employer Identification Number or Federal Employer Identification Number) as being the same thing, when in fact they are not.
The tax id number refers typically to the registration with the state’s tax office, usually named the Department of Revenue or something similar. The tax id number (sometimes called a resale certificate or sales tax permit) is usually needed for a business that collects sales tax or has employees, however, some states require all businesses to register for one. Sales tax is typically collected for tangible personal property (such as crafts at craft fairs) and some services. To check for each state’s requirements check out the guide for starting a business for your state. There is usually no cost to get a resale license / sales tax id in most states
When selling products online you may have some additional sales tax liability to consider. Currently, in most states, the business is responsible in collecting sales taxes from customers living in the state the products were shipped. This is called having sales tax nexus and can also require a merchant that ships product through multiple warehouses (such as through the Fulfillment by Amazon program or drop shipped products) to collect sales taxes from customers living in the same state as the warehouse. In the past, out-of-state customers were not required to be charged sales tax in many states, but this is changing after the recent ruling that states can require merchants to collect sales tax from out-of-state customers. Be sure to check with your state taxing body for current information. The first item is called sales tax nexus.
Next, the EIN is a unique number (much like a social security number for an individual) that is used to identify a business. This number is assigned through the IRS (Internal Revenue Service). An EIN is required for some business entities including the partnership, corporation and some LLCs. The EIN is also needed for sole proprietorships and some LLCs (Limited Liability Company). A sole proprietorship (or single-member LLC) would simply use the social security number of the owner. There is no cost to get an EIN and can be done from the IRS website. Here is more information about applying for an EIN.
Depending on the state, a business may need one, both or none of these numbers. In this instance, if you form a sole proprietorship or single-member LLC business entity with no employees, you won’t need an EIN but if you are in a state that charges sales tax or a state that requires one, you will need to register for a tax id number.
If you have more questions check out our article about the difference between state tax numbers and EINs.