Online Sellers Face Higher Costs As States Move To Tax Digital Data Processing Services
Online selling may be about to get more expensive as some states move to tax fees for some digital data processing services starting in October 2025.
Etsy sellers were concerned and confused by a recent notice they received warning them that tax may soon be collected on some selling fees if they are based in Texas - though the marketplace couldn't yet provide exact details of which fees may incur the new tax.
On October 1, Etsy will start collecting Texas sales tax on certain Etsy seller fees, which are likely to include transaction fees and listing fees billed to sellers located in Texas.
Etsy is required to collect and remit this tax to Texas based on recent changes to Texas Rule §3.330 which provides that certain marketplace fees are subject to Texas sales tax.
We are continuing to work with the taxing authority to determine the applicability of tax to seller fees, and there’s no action required from you at this time. We will provide more information regarding this matter as it develops and we determine which fees will be subject to tax.
Sellers discussed the announcement on Reddit, expressing confusion about how the changes might impact their profit margins.
I received this email today, and I'm unsure if this will change how my profit margins or not and if this will change how I do my state taxes every quarter.
Is anyone else in the same boat?
If they start charging me taxes on top of my listing fees and already ridiculous transaction fees.. I'm going to be forced to raise my prices.
A seller in the UK pointed out the similarities to their Value Added Tax (VAT) and explained how that currently works to give US sellers an idea of what they might be in for.
I’m in the UK, if it’s anything like VAT then it’ll be a percentage of your fees that will be taken, so yes it will affect your profit margin. Say it’s 10%, for every $1 in fees you pay, they’ll take another 10c for the tax. It will show in your payment account under the fees section (it’s listed as “VAT on sellers fees” for me). I deduct it from my turnover when it comes to doing my accounts.
The announcement from Etsy said the tax is likely to apply to transaction and listing fees, but doesn't mention other fees sellers might pay - like payment processing fees or advertising fees.
Recent updates to the Texas law have clarified that fees for payment processing are exempt from the tax, but advertising may be a bit more complicated.
Texas
In general it appears that fees for hosting/displaying ads may be exempt but if a company charges any fees for advanced services beyond ad placement - such as personalized analytics, data-driven targeting, or search engine optimization for ad campaigns - those additional services may be subject to the sales tax.
So it seems pretty clear that Etsy sellers in Texas should not be charged tax on payment processing fees, which are separate from transaction fees, but it's not so clear what other services may be subject to the tax.
eBay has not yet notified sellers in Texas of these upcoming changes, but things could be even more complicated (and expensive) for them since eBay stopped charging payment processing fees separately after the roll out of Managed Payments in 2021 and simply charges a single Final Value Fee on the total amount of the sale, including shipping and tax.
The law will apply to other marketplaces like Amazon, Walmart, Poshmark and more and could be even more confusing for platforms like Mercari and Etsy subsidiary Depop where certain fees are split between both buyers and sellers.
For example, it's likely the taxes will apply on the 10% fee Mercari charges sellers, but not clear if it will apply to the 3.6% Buyer Protection fee.
Liz Morton
Depop currently only charges sellers a payment processing fee of 3.3% + $0.45, which would be exempt, but again it's not exactly clear whether it would apply to the "marketplace fee" charged to buyers.
Liz Morton
And it's not just sellers in Texas who may face these new costs - Washington state has also passed legislation which would tax certain digital data and advertising services, though apparently not the actual sales commissions.
The 2025 Washington State Legislature passed Engrossed Substitute Senate Bill (ESSB) 5814, which added new business activities to the definition of retail sales.
As a result, businesses will be required to begin collecting sales tax on the following services starting Oct. 1, 2025:
- Advertising services.
- Live presentations.
- Information technology services.
- Custom website development services.
- Investigation, security, and armored car services.
- Temporary staffing services.
- Sales of custom software and customization of prewritten software.
ESSB 5814 also removes the following exclusions from the definition of digital automated services (DAS):
- Services involving primarily human effort.
- Live presentations.
- Advertising services.
- Data processing services.
A similar law in Maryland has faced legal challenges on constitutional grounds due to a “pass-through” provision barring directly passing the tax on to customers by a “separate fee, surcharge, or line-item.”
Rachel Konieczny
The 4th U.S. Circuit Court of Appeals recently ruled that provision violates the First Amendment, saying it effectively forbade businesses from shifting blame for increased costs to lawmakers.
Circuit Judge Julius Richardson said, "The pass-through prevents companies from describing the tax in the one setting where the consumer is guaranteed to look: the invoice. Keeping out of hot water with voters is not among the interests that can justify a speech ban."
Challenges are no doubt in the works for the Texas and Washington laws as well, though they may not be on the same grounds, leaving online sellers simply hold their breath until October to see how their businesses will be impacted heading in to the all important Q4 holiday shopping season.
Stay tuned for updates and let us know in the comments below how these tax updates will affect your ecommerce business!
