Topic: Member Workshop: The Biggest Tax You'll Face When You Sell on eBay
Host: dkennedycpa Date: Wednesday 09/10 Time: 10:00 a.m. to 11:00 a.m. Pacific time Location:Workshop Board
Description: When do you have to charge sales tax and for what state? Sales and use tax continue to be the most confusing taxes. Please join best selling-author and CPA Diane Kennedy as she guides you through the ins and outs of the maze of sales tax regulations in this one hour workshop.
Hello. My name is Diane Kennedy. I’ve been a CPA and Tax Strategist for over 25 years. My specialty is working with small business owners and real estate investors. My tax education company, Tax Loopholes, LLC, teaches people through books like Tax Loopholes for eBay Sellers, tapes and seminars on how to take advantage of the legal tax-reduction strategies that available to everyone. Please remember that laws and practices vary from state to state and if tax, accounting, legal and other specific expert advice is required, the services of a professional should be obtained. Diane Kennedy, CPA www.taxloopholes.com
When the government wants to promote a specific public policy it often uses tax breaks to get the public interested. After all, who doesn't want to pay less taxes? There are two things that the government wants you to do: (1) Start a business and (2) Invest in real estate. So, to encourage you, the government offers all kinds of tax breaks. Because these tax breaks are sponsored and created by the government, they're safe, legal, and meant to be used. Diane Kennedy, CPA www.taxloopholes.com
eBay has generously set aside time for us to present these business-related sessions designed to help you make more and keep more money. We have a new workshop every month. Mark your calendars! Diane Kennedy, CPA www.taxloopholes.com
Today we're talking about sales and use tax. There are some profound changes coming our way in how sales tax is collected, who will be responsible for paying it, and where. The Streamlined Sales Tax Project has been working in the background for years, trying to create one standardized system through which we all work. They aren’t ready yet, and this won’t happen overnight, but I believe it is coming, and I want you to understand what is going to happen. Diane Kennedy, CPA www.taxloopholes.com
Just before we get started, I want to tell you about this month's free offer. The first 10 people who post on this workshop will be entitled to receive a free copy of our video download, Advanced Business Structure Strategies . We'll be tracking posts throughout the workshop and will announce the recipients at the end, together with instructions on how to get your free download. Diane Kennedy, CPA www.taxloopholes.com
Now, on with the workshop! First I want to talk about the current state of sales taxes. Then, I’ll talk more about the Streamlined Sales Tax Project (SST) and how it will change our current system. Diane Kennedy, CPA www.taxloopholes.com
What is Sales Tax? Sales tax is a consumer tax added to a purchase. You typically see this when you’re out shopping. Your products are totaled at the cashier stand, and tax is automatically added to the taxable items. Diane Kennedy, CPA www.taxloopholes.com
But that’s just one form of sales tax. There are also things like privilege taxes, consumer levies, transaction taxes, gross receipts taxes, occupational taxes, business taxes, gross income taxes, excise taxes and local taxes. As a purchaser you don’t typically see these – they’re built into the price on the sales tag. As a seller, they are things you must be aware of. Not all states use all of these taxes. The chances are your state may only assess a couple of these additional taxes Diane Kennedy, CPA www.taxloopholes.com
A privilege tax means just what it says - for the privilege of doing business in a particular location, you get to pay a tax. It's usually assessed over your gross sales. For example, all incorporated businesses (corporations, LLCs and LPs) in California pay an $800/year privilege tax, which is charged regardless of the business’s profit or loss. This tax is paid by the business. You can adjust your prices to offset this tax, but you can’t pass it directly along to your buyers. Diane Kennedy, CPA www.taxloopholes.com
A Gross receipts tax is similar to a privilege tax - it's assessed on your business's gross sales and isn't something you can pass along separately to buyers. Diane Kennedy, CPA www.taxloopholes.com
A consumer levy is what we think of when we think about sales tax. It's the one that is calculated at the time of purchase and shows up on your receipt. This tax is actually a blend of state, county and city taxes, but you don’t need to divide it up. You pay a lump sum to your state government and they take care of dividing it up. Diane Kennedy, CPA www.taxloopholes.com
This tax is passed along to the consumer, but the responsibility for collecting it and making sure it gets to the state government belongs to you, as the business owner. The state doesn’t care where the money comes from, so don’t forget to charge sales tax. You’ll wind up paying it if you don't. Diane Kennedy, CPA www.taxloopholes.com
When is it payable? Usually on a monthly basis. California, Iowa, Missouri, Montana, New Jersey, New York, North Dakota, Utah and Wisconsin want it paid quarterly, and South Dakota (just to be different) wants to get paid once every two months. Diane Kennedy, CPA www.taxloopholes.com
A transaction tax is just like a consumer levy. It's charged to buyers separately over and above the cost of the item being sold, collected, and sent in to the government on a regular schedule. Diane Kennedy, CPA www.taxloopholes.com
Excise tax is usually an add-on tax for certain classes of goods: cigarettes, alcoholic beverages, motor vehicles, litter control and auto rentals, just to name a few. Unless you live in a state that has an "either-or" tax requirement, if you are selling these types of goods you'll need to add excise tax before you charge sales tax and then charge sales tax on the excise tax as well. Diane Kennedy, CPA www.taxloopholes.com
Occupation tax is generally charged over business income that stems from what your business does. This one pops up in things like auto rentals, and hotels. Diane Kennedy, CPA www.taxloopholes.com
What is Use Tax? Use tax is a replacement tax you pay when you buy things from another state and take them back home. It’s nothing more than the sales tax you would have paid if you'd bought those things at home. So if you went to Oregon and bought $10,000 worth of computer equipment before heading back to California, you owe use tax equal to the amount of sales tax you would have paid if you'd spent that $10,000 in California. Diane Kennedy, CPA www.taxloopholes.com
Use tax may also be imposed if you buy goods using a wholesale or resale certificate and keep or use the items yourself. So if you bought a load of designer handbags through your wholesale license (thus avoiding sales tax), and then decided to keep a few for yourself, you would owe use tax equivalent to the sales tax you would have paid to buy those items at a retail store. Diane Kennedy, CPA www.taxloopholes.com
Some states have use tax as a catch-all tax when an item isn’t covered by sales tax or if they want to impose an additional tax on an item. Diane Kennedy, CPA www.taxloopholes.com
Because use tax is often based on the honor system, and it isn’t very well known, it’s probably the most underreported and undercollected tax of all. However, as a business owner you’re at a higher risk for a sales and use tax audit that the average taxpayer. This is something state auditors are specifically looking for, so watch out! Diane Kennedy, CPA www.taxloopholes.com
Traditionally, sales tax has been assessed against all sales of tangible, or real, personal goods sold to persons or businesses who live within your home state. Some purchasers may be exempted from sales tax, such as medical and educational institutions. And personal services may be taxable as well, depending on the state. There are literally hundreds of state-level exemptions for various items. For example, in Connecticut, clothing worth $50 or less is exempt from taxation all year long. In Georgia, you have only a 1 week sales tax holiday where clothing worth $100 or less is tax-exempt. Diane Kennedy, CPA www.taxloopholes.com
When tax is assessed and payable at the purchase point, it’s called origin-based taxation – tax is due where the sale originates. That has made things tough for taxing Internet sales, especially where digital products are concerned. Where does the sale of an mp3 occur? At the office of the company? At the location of their servers? Diane Kennedy, CPA www.taxloopholes.com
For years brick-and-mortar stores have been complaining about Internet operations having an unfair advantage. States are beginning to listen (and to note the amount of money moving around). We’re seeing the beginnings of a movement towards destination-based taxation, which flips the sale around. With destination-based tax, wherever the goods wind up will be considered the point of sale for assessing tax. Diane Kennedy, CPA www.taxloopholes.com
Some states require you to charge sales tax on your shipping and handling charges while others don't. Looking back at our Georgia and Connecticut examples, Connecticut does, while Georgia specifically exempts transportation costs. Diane Kennedy, CPA www.taxloopholes.com
Generally speaking look at where your responsibility ends and the purchaser’s begins. If you have to re-ship or refund when an item doesn’t make it, and you live in a state that considers shipping and handling costs taxable - then charge sales tax on shipping and handling to sales within your state. Diane Kennedy, CPA www.taxloopholes.com
When Do You Charge Sales Tax? Simply put, nexus is a fancy term that means “where your business is located.” For tax purposes, nexus is where you live and operate your business. So if you are selling items from Dearborn, then Michigan is your sales tax nexus. If you sell items to other people in Michigan, you'll need to comply with Michigan state rules on sales tax. Diane Kennedy, CPA www.taxloopholes.com
Don't be fooled by companies who tell you that it's possible to avoid sales tax by incorporating a business in a state with no sales or use tax. It's not true. As long as you are listing, selling and shipping from Michigan, you're stuck with Michigan law (and Michigan taxes). Diane Kennedy, CPA www.taxloopholes.com
Orgination-based taxation is still the rule in most states. But, as we mentioned above, some states are looking at destination-based taxation. Others are doing more than looking. Effective July 1st of 2008, Washington State has gone to a destination-based tax system, within that state. Diane Kennedy, CPA www.taxloopholes.com
This means if you sell something from your location in Seattle, to someone in Centralia, you will have to charge and collect the sales tax that would be payable in Centralia. You may think it would be the same – after all, you’re both in Washington, but the reality is that there are often differences in the sales tax rates from county to county and city to city. This new law is adding a new layer of complexity to tax collection in Washington. Diane Kennedy, CPA www.taxloopholes.com
Washington State isn’t the only state making changes. New York has been in the news recently, with a controversial decision to require large Internet companies to pay sales tax in New York, even though those companies aren’t located in New York. The state’s rationale is that those companies have affiliate marketers in New York, and that’s enough to create nexus in the eyes of the state. Diane Kennedy, CPA www.taxloopholes.com
As an Internet seller you’re going to need to stay up to date on developments and how they impact you. Things are changing! Diane Kennedy, CPA www.taxloopholes.com
Sales Tax on Consignment Sales. If you're a trading assistant or operating a trading post, those sales are usually treated for tax purposes as though you owned and sold the merchandise personally. If you sell the merchandise to someone in the same state you're in you will be required to collect and remit sales tax on the sale. If you sell to someone outside your state, you won’t need to collect sales tax, but you should carefully document the sale to prove that you were not required to collect or remit the tax. In either case you are responsible for paying any sales tax that arises. Diane Kennedy, CPA www.taxloopholes.com
Sales Tax on Out-of-State Sales. Sales tax isn't usually an issue when you sell things to buyers outside your home state. But keep good records of your sales. If you are ever selected for a sales and use tax audit, underreported sales tax is an area that will be looked at closely. Diane Kennedy, CPA www.taxloopholes.com
Sales Tax and Drop-Shipments. Something else to think about is drop-shipping from a location outside your state. What do you think would happen if you lived in Oregon but your items were drop-shipped from New Jersey? Well, as long as your buyers didn't live in Oregon or New Jersey you'd be fine - but if a buyer lived in New Jersey, you'd have to collect sales tax on that item and send it to the New Jersey tax authorities. That could involve registering your business in that state and paying even more in taxes and fees! Diane Kennedy, CPA www.taxloopholes.com
Here’s a handy chart you can refer to when the question of sales tax arises. It’s valid under most current laws, but again, be aware that things are changing:
If You:
Buy Items in your home state, you pay sales tax in your home state.
Buy items in another state that charges sales tax, you pay sales tax in that state
Buy items in a state that doesn’t charge sales tax, you pay use tax in your home state.
Sell and ship goods on eBay to a purchaser who lives in your state, you charge sales tax on the purchase price (before shipping and handling charges are added) and remit to your state tax authorities
Sell and ship goods on eBay to a purchaser who lives in another state, you are not required to collect or remit sales taxes on the sale
Sell and ship goods on eBay as a trading assistant, where both the original owner and the purchaser live in your state, you charge sales tax on the purchase price (before shipping and handling charges are added, in most states) and remit to your state tax authorities
Sell goods on eBay as a trading assistant, where the original owner lives in another state and the purchaser lives in your state (goods are drop-shipped from original owner’s location), you are not required to collect or remit sales tax on the sale
Sell goods on eBay as a trading assistant, where neither the original owner nor the purchaser live in your state (goods are drop-shipped from original owner’s location), you might have to collect and remit sales tax, if the original owner and purchaser live in the same state
Sell goods on eBay as a trading assistant, where the original owner lives in your state and the purchaser lives in another state (goods are shipped from either your or original owner’s location), you are not required to collect or remit sales tax on the sale
That takes care of the way things are. Now let’s take a look at the way things may change, if the Streamlined Sales Tax Project (SST) comes into force. Diane Kennedy, CPA www.taxloopholes.com
Our current system is an origin-based system. Where you are, as the seller, is considered the nexus. So if you have a physical store in Phoenix and someone comes in and buys something, they will pay Arizona sales tax, no matter where they may life. Internet sales are a little different. If you sell to someone who doesn’t live in Arizona, you do not have to charge that tax. And this is where the problem arises. Internet sales have caused a massive increase in inter-state business – so much so that estimates have us losing about 15.5 billion dollars in state sales tax. No government in the world can afford to let that go unnoticed and unchecked. Diane Kennedy, CPA www.taxloopholes.com
What the SST will do is create a single system for all of the states, which is based on a destination-source instead. Now the taxes are reversed. Instead of collecting and sending in taxes in Arizona, you will now collect and send taxes to your buyer’s location, wherever that may be. Diane Kennedy, CPA www.taxloopholes.com
The SST has established a tax hierarchy for collection as follows:
1. Tax nexus is the business location where purchaser receives product. 2. Tax nexus is the physical location where the purchaser receives the product. 3. Tax nexus is the address for purchaser found in seller’s records. 4. Tax nexus is location indicated by purchaser’s payment address during a sale (i.e., if you pay using a credit card, where is your credit card processor located). 5. Location from where tangible goods were shipped or digital products originated from. Diane Kennedy, CPA www.taxloopholes.com
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