Sales Taxes for eBay, Amazon and Online Sellers
Show me the Money
(Added 2-22-16 - PayPal has this new information page about IRS taxes and PayPal.
PayPal IRS Tax Information https://www.paypal.com/us/webapps/mpp/irs6050w )
PayPal IRS Tax Information https://www.paypal.com/us/webapps/mpp/irs6050w )
I think the most challenging and difficult question that frustrated me for months when I decided to start selling legally on eBay and elsewhere in my state, was the issue of taxes.
Lets face it, collecting taxes when you sell on eBay or anywhere else is a new concept and many states do not have any laws or decisions about taxes and online sales.
If you are one of the unfortunate few who happen to live in my state of California, then you probably do not even know what the rules are, because despite making it a law, the State of California only initially invested $2,000 to promote the law or to make it known. However, as a Board of Equalization representative once told me, "There are sellers on eBay with their reseller permits who are collecting taxes, and they report other California sellers who don't. We are all to eager to pursue and penalize those reported sellers, we actually live for it".
I first started looking into taxes as an eBay seller. It had been a question of debate and inquiry since I first found out about eBay in 2006. After years of battle in federal court, then state courts, many States now have special laws regarding online selling, taxes, city licenses and the IRS does too.
Making The Complicated Taxes Topic Less Frustrating
Back when I was trying to figure out California's stance on collecting taxes, I spent a whole year looking for information, with no clue where to begin. No one else had any helpful information and eBay, being anti-taxes, offered no assistance or useful information. Eventually I found a book about taxes on eBay, but it honestly didn't help or point me in the direction that life would take me in this particular journey. It was written a year or two before the Federal Courts and State Courts had began finalizing the collection of taxes and licensing for eBay, Amazon and online selling in general.
We can thank Amazon for causing much of the problem, since the majority of laws governing online sellers were created specifically as a result of Amazon's creative attempts to bypass being taxed. After-all Amazon outpaced the majority of brick and mortar stores we always visited, yet Amazon was exempt from sales taxes and so were its sellers. Now Amazon leads the path and scrutiny for both, and if you decide to sell on Amazon, you better get your stuff together, cause the governments are watching you; less so on eBay and other marketplaces.
For those more inclined to watching a video v.s. reading a blog post who are in California, you can watch my YouTube mini-documentary that I made while going through the process of becoming a legal seller in California (Watch on YouTube)
At least here in California, you are required to get a seller's permit and begin collecting State Taxes if you sell more than three products within a year on three separate occasions or to three different customers. It doesn't matter the price of those three product, only that you sold more than three.
Personally, it really isn't a fair law, since it compares those three online sales to someone who holds three garage sales within a year. I don't know about you, but I've never had a $5,000 dollar single sale on eBay or any of the other marketplace I sell online. But that is the measurement being used, since the expectation is that a single yard sale could average $5,000, which really isn't to much of a stretch for the imagination.
Now take those three garage sales at $5,000 each and multiple them three times and you get $15,000. That is the assumed amount of potential sales from three yard sales compared to three sales on eBay or Amazon. The majority of those selling on eBay or elsewhere will take several years to reach that $15,000. Those earning $15,000 and above, selling part-time which would be what holding three yard sales in a year would be considered, would be in the minority not the majority.Not all States have the same laws, but at least here in California - if you sell three pencils for 25 cents each, you are then required to have a sellers permit and collect state taxes when you sell your forth pencil. Once you have your resellers permit (which is free), most cities in California will require you to also obtain a City Business License which averages $100 and up.
By the way, you should probably get your City Business License first in California, since many cities will penalize you for not having a business license first, before getting a sellers permit. That is what happened to me as presented in my mini-Youtube documentary, I was doing the ground breaking research for you and myself, was figuring it out as I went, and as a result ended up being penalized by my city.
It's not like finding this information online was easy, remember it took me a year, To get penalized on top of having to pay for a city business license when I was barely making over $100 a month at that time, was a punch to the face. With penalties, my city license was $240 for the first year, and that was because the state notified the city that I had a sellers permit, and the city contracts with a group that sends you letters and harasses you with threats of penalties until you pay. I hadn't budgeted for a $240 unexpected expense, I hadn't budgeted for anything, we never used to need to. I used to be able to just sell online, and when you consider the amount of time that goes into selling online, the profit barely justified even calling it a business, it was my hobby.
If you are smart, if you get such a letter, you will head straight to your local city hall business license office and pay for it immediately. If you send the payment and paperwork to the contracted company you will also end up paying more, because they take an agency fee. Its your chance to say "Screw You" to that contracted agency fee by going straight to your City Hall. Its always better to deal directly with the source than going through a third party anyhow.
Before addressing what you need to do if you are not in California, let me add that you will also need to read up on the IRS policies for online sellers. You will have to claim your profit and loss to the IRS at the end of the year. Consider this first year of being a legal online seller, your boot camp into being a business, even if you only have four pencils to sell.
Here are a few links you will need for information at the IRS.
Online Sellers IRS Information
Tax Laws and Issues for Online Sellers - IRS
Self Employed IRS Information
(Added 2-22-16 - PayPal has this new information page about IRS taxes and PayPal.
PayPal IRS Tax Information https://www.paypal.com/us/webapps/mpp/irs6050w )
You will want to find someone to help you with your taxes or use some kind of pay or free tax software or online help you do it yourself. I used a free tax software provided through my state. It had a bit of a learning curve and took a lot of extra research, but I hadn't budgeted for a tax consultant.It can be intimidating, especially when you have to do your profit and loss statement. My advice is to keep really good records of everything about the sale, and use a spreadsheet software like Excel or OpenOffice to keep track of your information.
Things you will need for doing your taxes
- What you sold and what you paid for it
- Where you purchased it
- How much it sold for
- What were your total costs to sell that product (cost, fees, shipping materials)
- All expenses related to your online selling (Car and Gas expenses, internet expenses, office supplies, testing and/or office equipment, etc)
- Records of all transactions, receipts, invoices, etc.
- After all your expenses, what was your actual profit
Realize that once you sign the seller permit and business license papers, you are instantly a business and expected to do what businesses do. But how do you know what a business does, since you started selling online without a business degree, as a hobby, to make a few dollars or to survive a job layoff?
Well, you start at wherever you begin. In my case, I began mid year in August, so I only collected taxes and did my IRS business taxes based on 6 months as an online seller. In someways that made it easier, but it also made it more complicated to figure out what products and expenses I had from the beginning of the year. My first year selling online, I operated at a loss, once all my expenses were deducted. It doesn't seem like it during the year, but a lot of online sellers are actually not making much profit, once you really look at what it costs you to sell online. Everything from your monthly internet expenses, seller fees, time invested, cost of product, packing and shipping materials, printer ink, car use, gas, etc. That is one of the good thing about doing taxes, you have to figure all of these things out, and if you operate at a loss for three years in a row, or do not meet the IRS threshold, they may determine you are not a business, but instead you are a hobby seller.
What I recommend you keep during your business year
(Wherever a digital copy is mentioned below, I am referring to a PDF file. A PDF file is a document format, originally created by the Adobe company. If you use Google Chrome's web browser, you can print and save as a .PDF file. Other browsers are free extensions you can add to your browser to let you print as a PDF. A PDF file creates a hard copy of whatever you see on your computer screen into a document that can be read later on your computer, smart phone or other device. Once you have your PDF, store it on an external hard-drive and at the end of the year make a CD or DVD back-up copy. Throw this CD or DVD into a fireproof safe, with your tax papers and printed copies. Fireproof safes cost under $100)
- Printed copy of packing slip with customers name and address, product description and amount paid (Write on the packing slip copy, the date, the marketplace where it was sold, your fees paid for listing and commissions costs, paypal or other payment gateway fees, shipping costs, and Note whether that sale requires you to withhold State Sales Tax)
- Printed copy of shipping label and receipt
- Digital copy of the PayPal e-mail or PayPal Transaction Information
- Digital copy of the Item Description Page that shows everything included, cost, marketplace, etc.
- Digital copy of packing slip
- Digital copy of shipping label
- Digital or printed copy of Bank Statements
- Digital copy of PayPal History for the year
- Digital copy each month of eBay or other Marketplace account sales and history
- Physical copies of all product and business related expense receipts
- Physical copies of all purchase receipts for supplies (write the date, amount, store name and what was purchased on the back of receipts since they tend to fade)
- Physical copies of gas receipts (write the mileage, date, amount paid and trip purpose on the back of your gas receipts since they tend to fade)
Hate Reading? Watch (How To Document Your Online Sales)
You will need all of the above information to figure out your yearly sales, expenses and taxes and to protect yourself in case you get audited in the future by the State or IRS. When it comes to places like eBay, keeping physical and digital copies of the sales transaction and fees is very time restricted, because eBay only stores that information in your account for 90 days.
Unfortunately, since I am not a tax person, you will still need help or assistance doing your actual business taxes, so check into it months in advance so your tax person or software can help you know anything else that has changed and new items you may need to retain.
Unfortunately, since I am not a tax person, you will still need help or assistance doing your actual business taxes, so check into it months in advance so your tax person or software can help you know anything else that has changed and new items you may need to retain.
I mentioned the IRS first, since not every state requires a seller permit, each state has different levels of requirements before requiring a permit or collecting state taxes, etc.
Other things to know about the IRS is that there is a set federal level of allowable profit from online sales, before you are required to also pay Social Security and Self-Employment taxes too. This can take as much as 20% of your actual profit, so you should be setting aside in a separate bank account, at least 20% of your sales. If you don't end up owing that 20% at the end of the year, consider it a bonus, or invest it into the new year.
How to manage your State Sales Taxes and Bank Accounts
Here in California, the threshold of requirements of more than three items in a year, is pretty low. Depending on the amount of sale you make in your state will also determine, how often you have to pay the sales taxes you collect. Fortunately, State taxes are easy, you just collect the money your customers pay in taxes and keep it in a separate bank account.
I recommend keeping this money collected in sales taxes in an interest baring account like a savings account or another account that is not associated directly with the account where your sales and expenses are being managed. This allows you to gain interest on the money you are holding for the state. It may not seem like much, but it adds up, and since you are having to conduct business on the states behalf, you might as well get a little bonus for having to mess with it.
Where can I find my States information for online selling taxes?
Again, every state is different, and each state has a different name for their Board of Equalization (the name given to the agency in California). In fact, the reason I wrote all of this out, is because a woman posted a question on the Storenvy Facebook Group asking about taxes in Florida.
I am thankful that my contacts with the California Board of Equalization have been helpful and pleasant, especially during my first time submitting state sales tax. I had to spend an hour on the phone with a Board of Equalization representative who finally did the final calculation, because I was wasn't getting it.
Hopefully, you have as equally a good experience when you deal with your own state.
Online Seller State Tax Collection Agencies By State
Here is a list of the office in your state to contact to find out about collecting online sales taxes. At the time of this blog post, all of the links should work.
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- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia (Washington DC)
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- New Hampshire
- New Jersey
- New York
- New Mexico
- Nevada
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
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