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eBay Sellers Face Tough Tax Questions

By Jennifer LeClaire
Mar 27, 2006 5:00 AM PT

If you are like millions of other Americans, you made money peddling products on eBay last year. Many earned enough to enjoy a night on the town. Others collected enough to go on their dream vacation. Still others made a living selling widgets at the online auction site.

eBay Sellers Face Tough Tax Questions

Regardless of whether you made a few bucks or several thousand dollars, there are tax implications to generating revenue. Do you report it? Do you need a tax ID number? Can you write off your home office? What on earth is a Schedule C, and do you have to file one?

A quick scan of eBay's user forums reveals that taxes are consistently a top issue. These questions, and others like them, abound. Indeed, with millions of Americans selling items through the various auction services online, sellers are struggling to understand what's deductible, what isn't, and how to ensure they report it the right way.

For those who start selling as a hobby, find a profitable niche, and build a bona fide business, the tax implications can be dizzying. That's why tax experts are rising up with products and services specifically targeting eBay sellers.

Good News, Bad News

Tax experts have good and bad news for eBay sellers. First the bad news: PayPal is actually a bank account. eBay sellers make deposits into that bank account, so they need to report the sales as income, said Eva Rosenberg, publisher of TaxMaMa.com.

The good news, she added, is that if you are selling used goods from around the house, odds are you are selling them for less than you originally paid and you'll have a loss. That means even though you report the income, you won't pay taxes.

"You need to decide if this is a business, a hobby, or you're just selling off collectibles. Each choice has different tax effects," Rosenberg told the E-Commerce Times. "If you're a business, you must have a profit motive, with plans to make the business turn a profit."

Business Owner or Hobbyist?

Should you turn your hobby into a business and cash in on the various deductions, like digital cameras and PayPal fees? Or should you remain a silent seller and avoid the IRS hassles?

TurboTax recently introduced a free online resource center for eBay sellers, as well as a new online service called TurboTax Personal & Business for eBay Sellers. It's a souped up version of its TurboTax Online Premier product with extra help and guidance for eBay sellers.

"There's a huge advantage to thinking of yourself as a business, but you have to be serious about it," Rupesh Shah, group product manager for TurboTax, told the E-Commerce Times.

"Most eBay sellers are quite small, so we try to help them consider what could qualify them as a business so they can take some deductions. The more deductions they can take, the more worthwhile it is to do business on eBay."

Looking for Tax Breaks

Rosenberg mentioned the profit motive as a key to business status. Shah has some additional recommendations for hobbyists looking for a tax break. Legitimate businesses, for example, would not necessarily restrict their sales to household items they no longer want. Legitimate businesses, rather, would purchase their inventory, mark it up and resell it online.

With legitimate business status comes legitimate tax writeoffs. "If you become a business, you can deduct your digital camera and your online photo storage fees. When you drive to purchase your inventory, you can deduct the mileage," Shah said.

Businesses may be able to deduct part of their home office, part of their phone expenses, part of their office supplies. In fact, Shah said there are about 200 possible deductions listed in TurboTax's eBay edition.

Of course, with the business status comes the more complicated tax form: the Schedule C. That's where the help of an accountant or a program like TurboTax may come in handy for eBay sellers who are averse to navigating the tangled web of tax filing requirements.

eBay Loopholes

eBay sellers may also find some loopholes in the tax code.

Sales tax is an area where eBay sellers are often "dumb like a fox," Joe Kennedy, author of "The Small Business Owner's Manual," told the E-Commerce Times. Kennedy does accounting for many eBay sellers.

"The regulations are usually that the seller must pay sales taxes on goods shipped within the same state. But buyers are on eBay to save money and will avoid vendors who charge sales tax," Kennedy said.

Some eBay vendors set up a mailing address in states like Nevada in order to avoid charging sales tax, he reported, while other vendors underreport or do not report sales taxes at all.

The questions seem almost endless. TurboTax offers tax advisors to answer those and other tough questions. eBay also holds seminars to help its sellers wade through the tax issues. eBay works with Diane Kennedy to present provide tax advice to its sellers.

Experts suggest eBay sellers educate themselves as much about taxes as they do about selling. For eBay sellers who make several thousand dollars each year through the online auction platform, the issue at stake, come tax time, could be your bottom line.


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