Net Taxes Could Arrive as Early as This Fall

More on the tax issues I’ve been discussing lately, from ZDNet

The era of tax-free e-mail, Internet shopping and broadband connections could end this fall, if recent proposals in the U.S. Congress prove successful.

State and local governments this week resumed a push to lobby Congress for far-reaching changes on two different fronts: gaining the ability to impose sales taxes on Net shopping, and being able to levy new monthly taxes on DSL and other connections. One senator is even predicting taxes on e-mail.

At the moment, states and municipalities are frequently barred by federal law from collecting both access and sales taxes. But they’re hoping that their new lobbying effort, coordinated by groups including the National Governors Association, will pay off by permitting them to collect billions of dollars in new revenue by next year.

If that doesn’t happen, other taxes may zoom upward instead, warned Sen. Michael Enzi, a Wyoming Republican, at a Senate hearing on Wednesday. "Are we implicitly blessing a situation where states are forced to raise other taxes, such as income or property taxes, to offset the growing loss of sales tax revenue?" Enzi said. "I want to avoid that."

A flurry of proposals that pro-tax advocates advanced this week push in that direction. On Tuesday, Enzi introduced a bill that would usher in mandatory sales tax collection for Internet purchases. Second, during a House of Representatives hearing the same day, politicians weighed whether to let a temporary ban on Net access taxes lapse when it expires on November 1. A House backer of another pro-sales tax bill said this week to expect a final version by July.

"The independent and sovereign authority of states to develop their own revenue systems is a basic tenet of self government and our federal system," said David Quam, director of federal relations at the National Governors Association, during a Senate Commerce committee hearing on Wednesday.

Internet sales taxes
At the moment, for instance, Seattle-based Amazon.com is not required to collect sales taxes on shipments to millions of its customers in states like California, where Amazon has no offices. (Californians are supposed to voluntarily pay the tax owed when filing annual state tax returns, but few do.)

Ideas to alter this situation hardly represent a new debate: officials from the governors’ association have been pressing Congress to enact such a law for at least six years. They invoke arguments–unsuccessful so far–like saying that reduced sales tax revenue threatens budgets for schools and police.

But with Democrats now in control of both chambers of Congress, the political dynamic appears to have shifted in favor of the pro-tax advocates and their allies on Capitol Hill. The NetChoice coalition, which counts as members eBay, Yahoo and the Electronic Retailing Association and opposes the sales tax plan, fears that the partisan shift will spell trouble.

One long-standing objection to mandatory sales tax collection, which the Supreme Court in a 1992 case left up to Congress to decide, is the complexity of more than 7,500 different tax agencies that each have their own (and frequently bizarre) rules. Some legal definitions (PDF) tax Milky Way Midnight candy bars as candy and treat the original Milky Way bar as food. Peanut butter Girl Scout cookies are candy, but Thin Mints or Caramel deLites are classified as food.

The pro-tax forces say that a concept called the Streamlined Sales Tax Agreement will straighten out some of the notorious convolutions of state tax laws. Enzi’s bill, introduced this week, relies on the agreement when providing "federal authorization" to require out-of-state retailers "to collect and remit the sales and use taxes" due on the purchase. (Small businesses with less than $5 million in out-of-state sales are exempted.)

It’s "important to level the playing field for all retailers," Enzi said during Wednesday’s hearing.

While it’s too early to know how much support Enzi’s bill will receive, foes of higher taxation are marshaling their allies. Sen. Ted Stevens, an Alaska Republican, said Wednesday that he’d like "to see an impregnable ban on taxes on the Internet."

Jeff Dircksen, the director of congressional analysis at the National Taxpayers Union in Alexandria, Va., said in written testimony prepared for the hearing: "If such a system of extraterritorial collection is allowed, Congress will have opened the door to any number of potential tax cartels that will eventually harm rather than help taxpayers."

Internet access taxes
A second category of higher Net taxes is technically unrelated, but is increasingly likely to be linked when legislation is debated in Congress later this year. That category involves access taxes, meaning taxes that local and state governments levy to single out broadband or dial-up connections. (See CNET News.com’s Tech Politics podcast this week with former House Majority Leader Dick Armey on this point.)

If the temporary federal moratorium is allowed to expire in November, states and municipalities will be allowed to levy a dizzying array of Net access taxes–meaning a monthly Internet connection bill could begin to resemble a telephone bill or airline ticket with innumerable and confusing fees tacked on at the end. In some states, telephone fees, taxes and surcharges run as high as 20 percent of the bill.

These fees that states levy on mobile phones, cable TV and landlines run far higher than state sales taxes at an average of 13.3 percent, cost the average household $264 a year, and total $41 billion annually, according to a report published by the Chicago-based Heartland Institute this month. Landlines are taxed at the highest rate, 17.23 percent, with Internet access being virtually tax free, with the exception of a few states that were grandfathered in a decade ago.

Dircksen, from the National Taxpayers Union, urged the Senate on Wednesday to "encourage economic growth and innovation in the telecommunications sector–in contrast to higher taxes, fees and additional regulation" by at least renewing the expiring moratorium, and preferably making it permanent. Broadband providers like Verizon Communications also want to make the ban permanent.

But state tax collectors are steadfastly opposed to any effort to renew the ban, let alone impose a permanent extension. Harley Duncan, the executive director of the Federation of Tax Administrators, said Wednesday that higher taxes will not discourage broadband adoption and his group "urges Congress not to extend the Act because it is disruptive of and poses long-term dangers for state and local fiscal systems."

Sen. Daniel Inouye, the influential Democratic chairman of the Senate Commerce committee, said: "Listening to the testimony, I would opt for a temporary extension, if at all."

If the moratorium expires, one ardent tax foe is predicting taxes on e-mail. A United Nations agency proposed in 1999 the idea of a 1-cent-per-100-message tax, but retreated after criticism. (A similar proposal, called bill "602P," is, however, actually an urban legend.)

"They might say, ‘We have no interest in having taxes on e-mail,’ but if we allow the prohibition on Internet taxes to expire, then you open the door on cities and towns and states to tax e-mail or other aspects of Internet access," said Sen. John Sununu, a New Hampshire Republican. "We need to be honest about what we’re endorsing and what we’re opposing."

Tags: Internet tax, ebay tax, sales tax

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Attn: Online Business Owners! Do you want to learn how to minimize your online business taxes?

My free report '5 Tax Saving Tips for Ebiz Owners' includes tips to help you get all the deductions and credits you're entitled to, so you don't overpay Uncle Sam!

Avoiding eBay Scams

While not tax related, this topic is important enough to share (and how many articles can you write about eBay and taxes anyway!?!).

Auction Profit Tips News talks about

Avoiding eBay Scams…

If it sounds too good to be true, it probably is! That same adage applies particularly well to bidding and buying items on eBay. While 95% of the sellers on eBay are honest and trustworthy and will offer you an enjoyable experience, the other 5% can make your eBay experience downright unpleasant.

The online auction format is ripe for deception as the basic transaction takes place in a “Virtual World” between a buyer looking to buy an item well below market value, and a seller trying to get more than the item is worth. The inability to see, feel and touch the item can make this transaction difficult. By following some basic tips and looking objectively at the auction you can avoid being disappointed.

Feedback: Always check the seller’s feedback. Read the feedback comments and decide, as best you can, if the seller is honest and trustworthy. Is this a person that you would want to do business with? While positive feedback is not a guarantee, if a seller has glowing recommendations and lots of happy customers, consider doing business.

Tricky Text: Read the auction title carefully and thoroughly. How about these titles, “GENUINE compatible IBM THINKPAD” “TWO XBOX 360 cartridges” “GOLD VERSACE like DRESS SIZE 6?. The dishonest seller will simply point to his “full disclosure” title and tell you tough luck.

Photos: Look cautiously on any auction that does not include a photo. A digital camera can be purchased for under $10 and if the seller is not willing or able to show a picture perhaps you should just move onto the next auction. Remember, very few things appear only once on eBay. If you miss out or choose not to bid on an item, a similar item will eventually be listed by another seller.

Shipping Cost: You are required to pay the shipping fee for an item if you are the high bidder. So don’t under ANY circumstances bid on an item that doesn’t disclose that fee. Even if the seller charges you the actual shipping fees incurred, the shipping on a large international item can end up costing much more than the item itself.

Return Policy: Every eBay listing now includes a place to disclose the sellers return policy. If the item is listed “AS IS” read the description and look at the photo very, very carefully. Don’t assume that just because an item doesn’t work that you are entitled to a refund.

Payment Method: Choose a listing that accepts PayPal as a payment method. A seller that accepts PayPal has been required to provide some basic information to open the PayPal account. Also PayPal has many buyer protection policies built in to help protect you from fraudulent transactions. Don’t under ANY circumstances use wire transfer or CASH as a payment method, it’s just too dangerous.

In summation; if your prospective seller has: a low feedback rating, accepts wire transfers or cash only, has a ridiculously low buy it now price, is selling copied or counterfeit items, shows no shipping costs in the listing, or has no return policy listed.

Run…..

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Tags: ebay, ebay scams

More tax woes for online businesses

I’ve written several posts on what I call the "ecommerce tax" lately.  But the ecommerce tax is just one tax issue floating around that could affect eBay sellers and online business owners.

There are actually several tax issues that you should keep your eye on if you do business on the net:

1. The first one, and the one that is getting the most attention, is Congress’s push to get the IRS to force brokers (companies such as eBay and Amazon) to report personal data on their customers.  In this proposal, customers who earned more than $5,000 in a year would be reported to the IRS.  This is a concern because some of the smaller brokers may not have the technology in place to keep personal information, including Social Security Numbers, safe.  For more information on what I affectionately call the ‘ecommerce tax’ please see Are You Ready for the Ecommerce Tax? and How to Get a Tax ID Number.

2. State and local taxing authorities are pushing for the ability to impose sales taxes on sales made online.  Currently, online business owners and eBay sellers are not required to collect sales taxes on items that are sold and shipped to customers in another state.  If the state the eBay seller or business is located in has a state or local sales tax, then you are supposed to collect sales tax on items sold and delivered to the same state, but many people are not complying with these rules.  For more information about sales taxes, see the Streamlined Sales Tax Agreement.

3. Finally, the Internet Tax Freedom Act, which prohibits states from imposing taxes on internet service, is set to expire in 2007.  States and local taxing authorities are eagerly awaiting the chance to collect taxes on internet services, but many companies, such as AT&T, Comcast, NetChoice and others, are lobbying for a permanent moratorium on this tax.  More information about making the internet tax moratorium permanent can be found here.

All of these issues could have a huge impact on eBay and other online businesses, so I will be keeping an eye on all of these tax issues and will keep you updated.

For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: ebay tax, online sales tax, internet tax, income tax, income tax on ebay

Now on Squidoo!

Tax Tips for eBay Sellers is now on Squidoo. 

If you’re not familiar with Squidoo, it’s a social networking site, like myspace, but geared towards business owners.  You can write about your business, sell products, add videos, link to other blogs and websites, and much more. 

Check out our Squidoo page here.  If you like it, please be sure to leave a comment or to ask a question.

IRS to audit more small businesses

The tax gap increased again last year, so Congress is asking the IRS to step up enforcement in an attempt to narrow this gap.

The IRS will step up enforcement by doing more audits and auditing smarter.

One way they will be "auditing smarter" is by focusing their audit efforts on:

• Sole proprietors – to look for under-reported income and inflated write-offs
• S corporations and parternships – the main focus will be on S corporation owners who take dividends instead of salaries to reduce the amount of payroll tax they pay.
• Individuals – the IRS will be scrutinizing Itemized Deductions (Schedule A), the Earned Income Credit (EIC), and capital gains.

This news combined with the recent proposal in President Bush’s budget that would require brokers such as eBay and Amazon to report personal data on customers to the IRS (see ‘Are you ready for the ecommerce tax?‘) shows me that the IRS is serious about closing the tax gap. I only hope that the IRS doesn’t hurt the honest small business owner in the process. 

For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: ebay tax, income tax on ebay sales, small business tax, audit, IRS, tax gap

Sell With Success Online

Kiplinger.com offers these nine tips to help you sell your stuff online:

1. Buy before you sell. Learn how the process works, and build a reputation for honest dealing.

2. Research prices. Surf other sites to find out what constitutes a fair price, and focus on completed sales, says Ina Steiner, an industry analyst on AuctionBytes. "Just because an item is listed for $100 doesn’t mean it’s going to sell at that price." For potentially high-value items, use an appraiser.

3. Start small. Limit your first sales to one or two low-value items, and keep in mind that some items, such as books, are easier to ship than others.

4. Leave the Matisse to the experts. You may want to save the good stuff for an auction house, says Steiner. "Auction houses know who the collectors are."

5. Use strong key words. Your item will stand out if your listing title uses brand names and defining characteristics, such as "Coach houndstooth Hobo bag," as opposed to "designer bag."

6. Include several pictures. Most sites let you post at least one image free. It’s worth paying extra for a gallery shot that appears with search results to give browsers a preview of your offering.

7. Time the close. Try to close on a weekend during the day, when more people are paying attention.

8. Tend to business. List shipping and payment options clearly, and send your item out promptly. Poor fulfillment will spoil your feedback.

9. Tell Uncle Sam. Even if you’re a casual seller, talk to your accountant about tax obligations. The IRS wants to know, "Is this a hobby or a business?" says Steiner.

I was very happy to see that learning your tax obligation when selling online made the list of tips.  This is a hot topic as the IRS is pushing for brokers like eBay and Amazon to report personal data on customers to the IRS (see ‘Are you ready for the ecommerce tax?‘), and as the IRS prepares to audit more small businesses.

For more information about your tax liability when selling online, please see ‘What taxes are you responsible for as an eBay seller?‘ and ‘Top Five Tax Tips for eBay Sellers‘.

Tags: ebay tax, income tax on ebay sales, online tax, online business, ebay business

Making the Internet tax moratorium permanent

The Internet Tax Freedom Act was enacted in 1998 to promote the growth of the internet by limiting taxes on internet services.  Unfortunately, this act is set to expire in November 2007.

The Permanent Internet Tax Freedom Act of 2007 was introduced in January of this year in hopes of permanently extending this moratorium.  Testimony about the act was heard today in Washington by the House Energy and Commerce committee.

Supporters of the act include Verizon, AT&T, Comcast Corp., Direct Marketing Association, eBay,  Information Technology Association of America, National Cable and Telecommunications Association, National Taxpayers Union, NetChoice, Small Business & Entrepreneurship Council, Time Warner Communications, U.S. Chamber of Commerce, United States Telecom Association, Yahoo and many more.

Click here to learn more about the moratorium and the hearing today.

For some great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: internet tax

Can eBay Sellers Still Make Money With Higher eBay Fees and Lower Sell-Through-Rates?

by Skip McGrath

A falling STR is a recipe for losing money on eBay!

Recent eBay fee increases have not been that high, but sell-through-rates (STR) are dropping all across eBay which effectively increases your listing fees as a percentage of total sales.

Your STR on eBay is nothing more than the percentage of auctions launched that resulted in a successful sale. For example, if you listed 40 auctions in one month and 30 of them resulted in a sale, then your STR is 75% which is considered very good.  Basically any STR over 60% is usually good enough to make money as long as your gross margin is at least 30%.  Of course the higher your gross margin, the lower your STR can be and still make money.  

Figuring your STR is very important to the health of your eBay business.  I get emails from readers all the time that say something like:

Hi Skip – I don’t know what I am doing wrong.  I sold over $3000 on eBay this month, but I haven’t made any money.

When I answer them I usually ask them to count the number of auction launched and the number that closed successfully.  I often see answers that reveal that their STR is often less than 50%.  Think about this a moment:  If only 50% of your auctions close successfully, then you have effectively doubled your listing fees.

The reasons for falling STRs across the platform are several. 

• Increased competition in commodity products and consumer goods.  The more sellers –the fewer sales.  As competition pushes down prices only the large sellers who can buy in volume can cut their prices and still make a profit. Marginal sellers are forced to keep their prices high and don’t get their minimum bid or reach their reserve. So more and more products are listed and fewer and fewer result in a sale.
  
• Fraud on eBay.  Despite eBay’s efforts, fraud continues to be present.  Although it is much less than media stories would have you think it does exist and the negative media has increased the perception of rampant fraud.  This has driven buyers from the platform.
  
• Fakes on eBay. Again, although eBay works hard to police and remove fake or counterfeit merchandise some still get through. Also again, media stories about fakes frighten buyers away from the platform.
  
• The lure of easy money through dropshipping on eBay.  There are now about 6 large companies who offer thousands of products that can be drop shipped to your eBay buyers after you make a sale. Most of these companies such as DOBA and Simplex (probably the two most well known) have thousands of “members,” sellers who think drop shipping is the easy road to profits, trying to sell products on eBay at prices that are equal to or higher than sellers who buy from real wholesalers are selling at.  This results in thousands of products being listed at ridiculously high prices that never result in a sale.
  
• Increase competition from shopping sites such as Amazon and shopping engines like Froogle, NextTag and Shopping.com.  It used to be that anyone who was already an eBay member automatically went to eBay first. Now people simply google a product name and get results that allow them to easily compare prices.

So with all of this, how can eBay sellers still make money on eBay today? Probably not with consumer or commodity products.  This leaves highly specialized niche products if you are selling new goods and the whole world on anything used, antique or collectible. Of course if you are a large seller with the ability to purchase your wholesale goods in large volumes you can still buy or import goods at margins that will allow you a profit, but that is outside the reach of many small or work-at-home eBay sellers.

As for drop shipping, this can still be very profitable if, 1) you can find a very specialized niche to work in, 2) you have a high (>$50) average selling price  and 3) you can source directly from an importer or manufacturer and not from one of the various membership drop ship sites.

The other route is to sell surplus or liquidation goods.  Doing this you are essentially selling last season’s or last year’s models of popular consumer products, but there is a market for those from bargain hunters and you can source these products for as little as 25% of the original wholesale price.

Tags: ebay, ebay fees, make money on ebay

OT: eBay Millionaires

Auction Profit Tips News had a post this morning that I just couldn’t resist about eBay Millionaires.

"eBay Millionaires – How’d They Do It?

How to get a tax ID number

One of the biggest concerns of President Bush’s proposed budget is the requirement that internet firms collect and report personal data, including Social Security Numbers (SSN), of its customers to the IRS.

One way to get around having to submit your SSN to a company is to get a tax identification number.  As a business owner (whether you are a sole proprietor, LLC, or a corporation), you can apply for an employer identification number, also known as a tax ID number. 

Although you may not be required to have a tax ID number (see ‘Do you need a tax ID number for your eBay business?’), it may be a good idea to get one if this proposal passes. 

If President Bush’s budget passes, including the proposal that internet companies collect personal data from customers, simply provide the internet company with your new tax ID number instead of your SSN.

Click here to apply for a tax ID number, or visit the IRS website and search for ‘employer identification number’.

For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: income tax, ebay tax, tax identification number

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