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Taxes for the eBay SellerTaxes and the eBay Seller

by: Skip McGrath

I often get email from readers asking if they have to pay tax on their eBay sales. And, many of the emails often confuse sales tax with income tax and sales tax with business licenses. So let's try and clear up some of the confusion.

There are two types of taxes that most affect Amazon and eBay sellers:

  • State Sales Tax
  • Federal (and State) income taxes

Four Reasons to have a State Sales Tax Number

Note that these are also called a resale certificate or resale number.

  1. It's the law. If you sell goods on eBay and ship them to someone in your same state, then you have to collect (charge the buyer) sales tax and pay that tax to your state. You do not have to collect, or pay sales tax, on sales where you deliver the goods to an out-of-state address. For example, if you live in Virginia and you sell something to someone else in Virginia then you need to collect and pay sales tax to the State of VA. But, if you sell the same item to someone in Florida, you can forget all about the tax.

  2. You can purchase items without paying sales tax on them. When you buy something that you plan to resell, you can purchase it without paying sales tax. But it must be for resale. For example you can not buy a new computer to use in your office and not legally pay sales tax. But if you go on Liquidation.com and buy a computer that you plan to sell on eBay, then you can buy it without paying sales tax.

  3. Most wholesale companies require a sales tax certificate. Almost all legitimate wholesale companies will ask for a copy of your resale certificate before they will sell to you at wholesale prices. Besides wholesale companies, in most states you need a sales tax certificate to open a commercial checking account. Every wholesale trade show and merchandise mart I have ever been to require a copy of your sales tax certificate before letting you in.

  4. In many States, registering for a sales tax certificate also registers you as a business in that state. Here is an example: I live in Washington State. We have what is called a Unified Business License (UBL). When a new business fills out a UBL application, if approved, they are granted a business license that includes a sales tax number and a unified business license that covers the State and all cities, counties, townships, etc.

    Many states are moving to a similar system. So you will see this more and more.

Getting a sales tax certificate is easy. In most states you can do it online. Just Google the words: GA Sales tax. (Replace the GA with the two letter abbreviation of your state.

Before we leave this subject, let me address the issue of Nexus. The word, Nexus means : A relationship or connection between people or things. In the case of sales taxes, it has a more definite meaning. For years a nexus for sales tax purposes has been defined as having a physical presence in a state such as an office, retail store or warehouse.

If a company had one of those, then any sales made and delivered to someone in that state would be treated the same, as if a company resided in that state. Lately, however, the States expanded that definition to include goods owned by you that were briefly stored at, or passed through, a warehouse in that state (Such as goods in an Amazon FBA warehouse, or at a dropshipper's facility).

As you can imagine, this is quite controversial. A large percentage of tax professionals and constitutional lawyers strongly disagree with that and feel it would not stand up in the courts. What this amounts to is: The jury is still out. It will be months, if not years until these cases can be adjudicated. So whether you file and pay tax in those other states is up to you, but I would speak with a tax professional.

Federal (and State) Income Tax

There is no income tax on your sales - you only pay income tax on your profits. If you make more than $600 in any one year, then the IRS (and your state if you have state income tax) requires you to file a Schedule C - Statement of Profit and Loss.

You start by listing your gross sales (including any amounts the buyer paid for shipping on your Schedule C. Now subtract your costs including the cost of the goods you bought to resell, Amazon, eBay and PayPal fees, bank fees, cost of shipping and materials and what you paid out to ship the goods to the customer.

You can also take deductions for things like Office in the home expense, mileage to take your shipments to the post office, ISP fees, travel to trade shows, and many more things.

Look on Amazon or eBay for a book called The Complete Tax Guide for E-commerce Retailers including Amazon and eBay Sellers by Martha Madea. This book will list all the deductions you can take for expenses and show you how to keep track of them.

Once you total up your expenses, you subtract them from your income. The amount left over is profit. That is the amount you will add to your personal income tax statement.

If it's a loss you can also take that against any other income you have. For example, if your W2 income from your full time job is $36,000 and you lost $2000 on your business, you would subtract that from the $36,000 and only pay tax on $34,000.

Some folks take the risk of ignoring their online income. That can really get you in trouble. Both PayPal and Amazon will issue 1099K forms (with a copy to the IRS) to all sellers who sell over $20,000 a year. Now, you don't owe taxes on the amount of the 1099K, but the IRS will know you had some online income and be looking for your business tax income.

Regarding State income taxes, most states base them on a percentage of the taxes you paid to the IRS. But, there are some differences, so make sure to get some professional help at tax time.

So there you have it. Oh, one more thing. Once your business becomes substantial (over $2500 month), I strongly recommend hiring a CPA to do your taxes instead of a local tax preparer. CPAs are much better at finding deductions and if a CPA signs your return, you are far less likely to be audited.

Skip McGrath,

Author - The Complete eBay Marketing System and The Complete Amazon Marketing System .

Publisher - The eBay & Amazon Sellers News - The oldest and largest FREE newsletter for eBay and Amazon sellers.

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