EcommerceBytes-NewsFlash, Number 2779 - April 10, 2012     1 of 3

States and Snitches Target eBay Sellers Who Duck Sales Taxes

By Kenneth Corbin

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Sellers who take the trouble to register with the relevant tax authorities and equip their online shops with a tax calculator might be understandably frustrated when they see rivals selling in their same category who do not charge customers sales taxes. After all, they're playing by the rules, and are rewarded with what can be a steep competitive disadvantage, right?

Much of the discussion around online taxes has been steered by the ongoing debate over interstate issues, relating to whether sellers in one state should be required to collect and remit sales taxes on purchases made by customers in another state. But while that issue remains unsettled amid a tangle of judicial precedent, state and federal legislative initiatives and intense lobbying, sellers - online and off - are clearly required to remit the tax on sales within their own state, save for the five states that have no sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon). But many sellers do not.

"We call them non-filers," said Verenda Smith, deputy director of the Federation of Tax Administrators, a group that represents tax authorities in all 50 states and the District of Columbia.

State tax authorities are acutely aware of the uneven playing field between sellers who charge customers for the obligatory sales tax under state law and those who don't, though enforcement remains a challenge. While it's not an Internet phenomenon, new technology has doubtless complicated the problem.

"That's existed since the dawn of taxation," Smith said of the non-filers. "We are particularly aware of it in the era of Internet sales where you don't have to have much in the way of infrastructure, particularly in the way of legal expertise or accounting expertise, to start up a small business."

One California-based eBay seller who found himself in this predicament decided to take matters into his own hands and contact a state tax authority, in this case the California Board of Equalization.

"It is getting worse and worse," the seller, who requested anonymity to speak candidly, told EcommerceBytes. "Depending on the product category, half to two-thirds of my eBay competitors in California don't collect California sales tax on sales shipped within the state, including many Power Sellers, Top Rated Sellers and sellers with feedback ratings in the thousands."

Alarmed at the volume of competitors who weren't collecting taxes, the seller contacted California's BOE. Those inquiries, the seller said, prompted the tax agency to begin investigations, and in some cases, take enforcement actions against sellers who had neglected to collect taxes on in-state purchases, often resulting in significant repayments of back-due taxes, interest and penalties.

"Taking it up with eBay is pointless," the seller said. "They have been lobbying against any and all tax measures that negatively affect them."

A spokeswoman for eBay did not respond to requests for comment, though the company has taken an active role in fighting proposals at the state and federal levels to strengthen the sales-tax collection obligations for its sellers.

Guidelines vary from state to state, but California authorities set a low threshold for the requirement for part-time sellers to register with the state and collect sales taxes.

"Generally a person who makes three or more sales of merchandise in a 12-month period is considered a retailer and required to hold a seller's permit. This is true regardless of whether the sales are at retail or for resale or delivered outside California," said a spokesman for the California BOE.

"A person who sells merchandise in California, even temporarily, is required to register with the BOE and pay tax on their taxable sales. Sales by retailers made through Internet auction houses, such as eBay, are generally subject to California sales tax," the spokesman added.

The situation is hardly unique to eBay, or California. Smith of the Federation of Tax Administrators explained that state tax authorities typically have a form on their website where people can report sellers who don't collect sales taxes, and they are eager to hear from whistleblowers.

"Tax agencies have two favorite sources of information beyond the obvious (the IRS): angry ex-wives and disgruntled competitors. Please let your tax agency know," Smith said.

She noted that tax authorities are generally conscientious about privacy considerations, both for whistleblowers and the sellers they are reporting, so people who report non-filers shouldn't expect to learn of the results of any investigation the agency might initiate.

"If there's one thing we're good at it's keeping things private," she noted.

Smith and the frustrated California seller both acknowledged that many eBay users who don't collect taxes are simply ignorant of the obligation. Many are part-time sellers who might think that sales taxes don't apply to their operations

A new federal law could go a long way toward bringing non-filers into compliance. Starting this year, payment companies such as credit card providers and a variety of electronic services like PayPal, Amazon and Google will be required to submit a new form, the 1099-K, to the IRS reporting monthly sales totals of the transactions they processed. The IRS, in turn, will pass that information along to the states, laying the groundwork for a potential audit trail.

"We think the 1099-Ks will definitely be a useful," Smith said. "I think a good deal of this is going to go away over the next year. Give it a year."

In the meantime, tax authorities across the country who are smarting from revenue shortfalls are eager to hear about sellers who aren't collecting and remitting the appropriate sales taxes, particularly those who have been operating for long periods of time. A compliance action against those types of sellers can help states recoup substantial sums in the form of the back-due taxes, interest and penalties.

"Finding a non-filer - someone who's not been collecting for some time - tends to get attention within a tax agency," Smith said.

Those cases are almost always handled as civil proceedings, Smith said, and only typically veer into criminal territory in cases when investigators determine that a seller has been willfully violating the law and engaging in practices like collecting the sales tax and then pocketing it, rather than remitting it to the state, or if a seller under audit lies to the investigators.

"We have a history in this country of not putting people in jail for debt," she said. "It would not go to the criminal level unless there were something happening other than a failure to collect when you should have been collecting. That by itself is not going to be a criminal matter."

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About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.

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