I had the honor of speaking at the “eBay on Location” event in Denver, Colorado (www.ebayonlocation.com), on two topics of great interest to eBay sellers and e-merchants generally:
O the “Legal and Tax Aspects of Your Business on eBay”; and
O “Answers to the Most Common Business Questions When Selling on eBay.”
Needless to say, I got a ton of questions after each session. Here are some “cutting edge” tax issues facing eBay sellers today, and how I responded.
Q: “If I buy all of my eBay merchandise at a local retailer and pay sales tax when I purchase it, am I subject to reporting and paying sales tax on those items when I sell them on eBay later on?”
A: The short answer to this question is “yes”. Even if you pay sales tax when you buy the item, you are required to collect sales tax if you sell it on eBay to a resident of your state. This shouldn’t be surprising: after all, you pay sales tax when you buy a used car or secondhand clothing, don’t you?
What you are supposed to do in this situation is add the amount of sales tax for the item you bought to its “cost of goods sold”, which you then deduct from the sales price when it sells on eBay. So, for example, if you buy something for $1 and pay six cents sales tax on it, the “cost of goods sold” of that item if $1.06. If it sells on eBay for $2, your gross profit (before eBay and PayPal fees, and shipping/handling costs) is 94 cents.
Q: “Do I have to pay use tax on the items I buy for my personal use, or just the items I buy for my business that I haven’t paid sales tax on?”
A: A “use tax” is a tax on items you buy for your own consumption (not for resale) on which you did not pay sales tax. So, for example, if you buy paper clips for your business at a local office supply store and pay sales tax at the register, you do not have to pay “use tax” on it thereafter.
If, however, you bought those same paper clips from an out-of-state vendor on eBay, you would not be required to pay sales tax on that purchase, and you would have to pay use tax to your state for the privilege of using those paper clips in a local business.
Every state that has a sales tax also has a use tax, and the rates are almost always the same. Many states impose a use tax on individual, consumer purchases as well as business purchases. Talk to your accountant to find out the rules that apply to you.
Q: “I am constantly asked about taxes on consignment items. Is it correct to say that if you buy an item for $10 and you sell it for $9, you have not made a profit, or do you have to claim that $9 as income on your taxes?”
A: Consignment arrangements don’t work that way. In a consignment, you take possession of the merchandise, but you don’t pay anything up front for it. You then sell it on eBay for whatever price you think is right (or as dictated by the person who consigned you the merchandise, called the “consignor”). When it sells, you deduct your commission (usually 50% of the sale price) and pay the rest back to the consignor. At the end of the year you report ALL of your consignment commissions as income on your tax return, and send a Form 1099-MISC to each consignor reporting the total amount you paid to them (i.e. their share) during the year if it was more than $600.
Q: “I am completely confused about the tax issues when accepting consignments from people in other states. How can I possibly keep track of the sales tax with each sale if it happens to be sold back to that state?”
You are required to pay sales tax (1) in your state if the purchaser is a resident of that state, and (2) in each state where your consignor has a “physical presence” if the purchaser is a resident of that state. So, for example, if I, a Connecticut resident, were to consign merchandise to you, you would have to collect and pay Connecticut’s 6.35% sales tax whenever one of my items is purchased by a Connecticut resident.
Most of your consignors, if they are individuals, will have a “physical presence” in only one state – where they reside. If you are dealing with companies, that is called “drop shipping,” not consignment, and the rules get more complicated because these companies usually have multiple locations around the United States. I have devoted entire chapters of my book “The eBay Seller’s Tax and Legal Answer Book” to consignment sales and drop shipping, and you will find the information there helpful.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.
NOTE FROM KAT
If you have questions about Sales Tax as an Amazon FBA seller, you need my new book! Introduction to Sales Tax for Amazon FBA Sellers