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Tax Issues for eBay Sellers and Online Businesses

By: Kristine McKinley

If you sell on eBay, or if you have an online business, listen up. There are several tax issues in the news right now that could have a huge impact on the way you do business.

The first issue, and the one that is getting the most attention, is Congress's push to get the IRS to force brokers (companies such as eBay and Amazon) to report personal data on their customers.

In this proposal, brokers (such as Amazon and eBay) would be required to report names, addresses, and gross proceeds of each customer that completes more than 100 separate transactions and generates more than $5,000 in gross proceeds each year.

Most likely, companies will report this information for all of their customers because they won't know who will meet the criteria above until the end of the year.

This proposal could cause problems for smaller companies. Not only will collecting this information be costly, but smaller companies may not have the technology to keep this data safe from hackers. The Center for Democracy and Technology is concerned about the safety of the personal data collected, and rightly so, given how much fraud and identity theft takes place today.

The proposal could have a negative affect on ecommerce, as some customers may shy away from doing business on the internet if they are required to provide Social Security numbers.
If passed, the proposal will be effective beginning January 1, 2008. There is no indication that there will be any retroactive treatment for the new law.

Secondly, state and local taxing authorities are pushing for the ability to impose sales tax on sales made online. Currently, eBay sellers and online business owners are not required to collect sales taxes on items that are sold and shipped to customers in another state.

If the state the eBay seller or business is located in has a state or local sales tax, then you are supposed to collect sales tax on items sold and delivered to the same state, but many people are not complying with these rules.

Every state (and many localities) has their own sales tax rate and rules, so the Streamlined Sales Tax Project was introduced to help simplify the collection and reporting of sales tax. Without some simplification, the cost to small businesses to comply with sales taxes would be tremendous.

Finally, the Internet Tax Freedom Act, which was created to promote the growth of the internet, is set to expire in late 2007. This act prohibits companies from taxing internet services, and if this act expires, small businesses would be hurt the most.

States and local taxing authorities are eagerly awaiting the chance to collect taxes on internet services, but many companies, such as AT&T, Comcast, NetChoice and others, are lobbying for a permanent moratorium on this tax.

All of these issues could have a huge impact on eBay and other online businesses, so if you make your living online, you should keep your eyes and ears open for news regarding these tax issues.
Note: This article was written May 27, 2007. Tax laws change frequently, so please check with your tax professional if you have any questions about the tax issues discussed above.

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