I am in the process of setting up an Etsy Site and read this article http://www.handmadeology.com/etsy-news-etsys-new-checkout-system-supports-sales-tax/ and noted this specifically "If you have sales tax settings at PayPal, the new Checkout will ignore these settings, so make sure you set sales tax rates on Etsy" This new checkout in Etsy rolled out August 2010- but I think the old checkout method was still in place for awhile and did keep using your PayPal tax settings. That may have recently gone away- thus the change. Hope this helps.
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