Ina Steiner EcommerceBytes Blog
News and insight focusing on ecommerce.
by Ina Steiner, Editor of EcommerceBytes.com
Tue Feb 6 2018 17:13:56

Sellers in Two States Shocked by PayPal Tax Notice

By: Ina Steiner

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Some Massachusetts and Vermont residents are getting an unpleasant surprise in the mail this week from PayPal thanks to revenue-hungry legislators in their states. And beware, other states may follow.

Payment processors such as PayPal are required to send 1099Ks to customers who process $20,000-plus-200 transactions in a year. But some people are getting 1099Ks from PayPal for amounts as low as $600 with very few transactions.

That's because Massachusetts and Vermont retroactively passed new laws last year requiring payment processors to file 1099Ks for customers who processed at least $600 in 2017, no matter how little the number of transactions they processed. (We live in Massachusetts and follow small-business and tax issues, and we hadn't heard a word about this new law until today.)

Sellers who inquire about the surprise 1099Ks are reporting on forums that PayPal is telling them it is not sending the form to the Feds - we've got a question in to PayPal about this. We also asked PayPal why it didn't inform sellers of the change ahead of time (as a courtesy), since this came as a complete surprise to many sellers until they opened their mail this week.

Some may have little sympathy for those impacted, assuming they are tax evaders. But this also impacts people selling casually who are following IRS guidance about "Online Garage Sales" - see this page on the IRS website.

On one board, a seller noted he received a 1099K for $630. He said he had probably paid $1,000 for the items, so didn't profit from the sales. But given that the law is retroactive, someone in his shoes may not have considered whether they had receipts for the items before selling them online last year.

Such laws will likely push casual sellers towards local selling through classified sites and apps, including Craigslist and Facebook, unless / until lawmakers figure out a way to track cash transactions.

Note: To be clear, this isn't about state sales tax, it's about state income tax. See more info on 1099Ks in this post from 2012.

Update 2/8/18: See today's Newsflash article, "PayPal Advises Etsy Sellers on Dupe 1099K Tax Forms."




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by: DingDong This user has validated their user name.

Tue Feb 6 19:09:33 2018

Can't wait for this mess.
I help others since they don't have internet in selling and I sell their items for them (anything from $50-$300 in a year )
My sales and use tax is based on certain monies that does come through Paypal but not all of it is related to sales.

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This user has validated their user name. by: Marie

Tue Feb 6 19:45:03 2018

For those affected by this, part of their concern should be directed at their states for a lack of notice.  Or was it in the news and just missed?

At first blush, my reaction was, well they shouldn't be surprised and should be paying their share of taxes.  But when something is retroactive, it is VERY difficult to resurrect the records that one may need for a low $$ of sales.  Personally I find the retroactive part of this extremely unfair.  People may have and probably would have handled things differently if they had known about the 1099s.

As to those that are selling in reliance on the IRS rules for garage sales.  Those rules are still in place to my knowledge, so if they report the income properly they should be just fine.  Just keep good records and they should be just fine.

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This user has validated their user name. by: The End

Wed Feb 7 06:06:41 2018

https://www.archives.gov/founding-docs/constitution-transcript


Article
1, Section 9, Paragraph 5 :
"No Tax or Duty shall be laid on Articles exported from any State."

SUE PAYPAL.

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This user has validated their user name. by: The End

Wed Feb 7 06:08:39 2018

Just a reminder.

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This user has validated their user name. by: Rexford

Wed Feb 7 06:59:04 2018

"until lawmakers figure out a way to track cash transactions"

This will ensure that at some point they will turn us into a cashless society where everything can be tracked.  

Still haven't received 1099s from PayPal and I know I qualify.  Hopefully I can pull those from their website.

While I believe in paying my fair share of taxes, just look who a $630 1099 targets.  Certainly not the richest 1%.

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by: Damariscotta This user has validated their user name.

Wed Feb 7 07:16:28 2018

I have known about these for a while for other business.

You can get more information from irs.gov, or a clearer, basic explanation from sites such as H&R Block. https://www.hrblock.com/tax-center/irs/forms/what-is-form-1099-k/
<
BR>Note
that this is not related to sales tax. It is related to income.

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This user has validated their user name. by: RKTOYS

Wed Feb 7 07:18:31 2018

When I worked for Revenue at the state level, a "compromise" program was started up.  If you were Walmart and didn't feel like paying the full sales tax (even though you charged it to your customers), you could demand to pay only a portion of it and keep the rest.  I looked up a list right before I left and we'd given away something like $40M this way over a year or so.  As a sole proprietor, though, with barely a thousand in annual sales at the time, they went after me for $25 (that I'd actually sent in but somebody lost).  I considered writing the local papers, asking them to file the equivalent of a FOIA, but everybody was too worked up about gays or Benghazi for it to have gone anywhere.

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by: mcposty This user has validated their user name.

Wed Feb 7 12:37:12 2018

Sickening that its retroactive, thats rediculous.

Someone could easily right off all the shipping, paypal fees, ebay fees, and what they purchased it all for...most of the time, the state will find they owe that person money lol

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This user has validated their user name. by: Marie

Wed Feb 7 13:04:07 2018

@theend

This isn't about state sales tax.  It is federal income taxes.

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by: dander This user has validated their user name.

Wed Feb 7 13:49:41 2018

I thought that it was against the Federal constitution to pass laws that were retroactive.

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by: papergoy This user has validated their user name.

Wed Feb 7 15:27:17 2018

Count me among those who have zero sympathy.  I have paid my taxes on all sales (income, state and sales) from day one.  Meanwhile I am sure I've lost sales to people throughout the years who were not collecting sales tax (I know this as from time to time I get a complaint from someone about my charging it. I point out that they are still liable for it as they would have to pay use tax anyway, so they should thank me for saving them the paperwork. Somehow, they are not thankful.  I also point out that they should not shop people who do not charge the proper tax, as if those people are willing to cheat the government who has the ability to fine and/or jail them, they will certainly have no qualms with cheating an ordinary citizen. Again, they are not moved) or paying income taxes on their earnings.  As to following the IRS rules on garage sales- first, this is (per the article) NOT going to the feds, so you're fine with them.  And if you follow your local state rules on garage sales (which may or may not differ), then you should be fine IF you're truly doing the volume of sales that would be in line with a garage sale, and you're not out purchasing more inventory (which would make you a business).  Bottom line, if you are running a business, pay your taxes- and if you are not and are following the rules of your state, you will be fine.  As to the retroactive portion- UNLESS the state law on garage sales was changed in the dark of night, what difference does it make?  Sure you may have your return held up for a few weeks until you explain to the state why you didn't file a business return, but why are you getting money back anyway- the smart thing to do is to pay the maximum amount you can at tax time without triggering penalties- why give any government (or anyone) an interest free loan?  

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by: Chicago48 This user has validated their user name.

Thu Feb 8 01:13:41 2018

I don't understand how it is they are 1099ing for state INCOME TAX.  I report my earnings (profit/loss) to the IRS every year and some years  I'm only clearing $1000.  So that means that I have to start reporting sales on $1000 to the State, even though it's reflected in my profit/loss statement to the IRS?  This makes no sense.

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by: Watching the Wheels This user has validated their user name.

Thu Feb 8 01:34:02 2018

It's called, the government being broke.

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by: Moonwishes This user has validated their user name.
Web Site

Thu Feb 8 01:41:28 2018

@Chicago48 - if you have $1000 in income to report to the IRS, you also need to report it to the state and your local income tax. The only time you would be exempt is the states that don't do income tax. Depending on how or who is doing your taxes, the information should flow through to the state form. But since most local taxes aren't part of Turbo tax, that has to still be reported. A 1099-Misc or any of the 1099 forms are for the three different taxing bodies. Not sure why it makes no sense. Also hope you are using a tax person who is taking care of this appropriately for you.

Income no matter how made - on line or off, is reportable income to the feds, the state and the local tax office. It has always been like this before the internet was even started. I can not fathom why people think the only time they have to pay taxes is if they get a 1099 saying they have to. It was blowing my mind the other day on the Amazon forum from some of the guys that got 1099s who seemed to think they didn't have to declare any of the money below $20K as it was untaxable!

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by: Ebay Seller-Ebay Buyer This user has validated their user name.

Thu Feb 8 01:45:01 2018

Liberal states love taxes, which always hurt businesses.  This will drive away sellers in those states

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by: Chicago48 This user has validated their user name.

Thu Feb 8 02:23:44 2018

@Moonwishes, thanks for that.  I just thought that whatever I filed with the IRS flowed into the State.  

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by: Moonwishes This user has validated their user name.
Web Site

Thu Feb 8 02:35:13 2018

@Chicago48 - It flows if you use tax software, but if you are doing taxes manually then it wouldn't. A tax prep person should know better. Local taxes are done separately from the fed and state, so has to be included depending on how your local taxes are set up. I know in my state the state schedule C picks up most of its numbers via the Federal form but because it does have some different laws, those have to be accounted for differently at times.

The thing for everyone to remember is that all income is supposed to be reported to the feds the state as well as your local taxing authority, whether you get a 1099 or not, whether you made $500 or $500,000. Income is income, but generally selling on line for more than a few pieces of personal stuff you want to get rid of, it is considered business income and that means you can take off expenses as well and then you find out how much your actual income was and you can decide if it was worth it or not to be selling.

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by: Chicago48 This user has validated their user name.

Thu Feb 8 02:36:19 2018

@moonwishes, yes I always use tax software.  Thanks again.

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This user has validated their user name. by: Philo

Thu Feb 8 03:05:32 2018

I don't mind paying what I owe for taxes.  How is paypal going to get the correct number?  One return and its wrong  "aka Keep the item, I will send you another."

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This user has validated their user name. by: Marie

Thu Feb 8 03:12:28 2018

OK I have got to say I am really confused by this.  It doesn't affect me as I've always claimed whatever I earn to both my state and to IRS on the appropriate forms every year.  I've been scratching my head over this for a couple of days.  I know someone out there will be able to explain this to me, but at this point the answers are escaping. me.  Once someone explains it to me I'm sure it will make sense.

Here is what confuses me.

1.  How can a State mandate that a Federal form is to be issued by various internet entities?  A 1099 is NOT a state form.  It is a Federal form.  So under what premise do they gain the right to do this with a federal form?

2.  How can a State mandate that a 1099 has to be issued for the $$ thresholds they set and the form does not have to be sent IRS / the feds?  It's their form!!  

3.  If the Federal form is not being sent to IRS, then who is it being sent to and why is it a Federal form NOT sent to the feds?  Does it just go to the seller?   If so, why and what good would that serve.  Or is the State mandating that a Federal Form [1099] be sent to them by certain internet entities?  And if it is being sent to the state, why is the state getting a Federal form?  

IRS does report to states how much income we claim on our income taxes if we are claiming anything under self employment or a business.  What you claim to your state should always match what you claim to IRS.  

The 1099Ks that PP releases for those with $20k + worth of income or 200+ transaction does NOT get sent to the states, it is sent to IRS.

Yep I'm confused.  

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