Record keeping for auction sellers

Part 3: Yes, Virginia, there is an IRS

Our online store at Yahoo
Our eBay store
My seller's profile at eBay (with all customer feedback)

The following article was written for GoTo Auctions (formerly known as AuctionRover). The rights have reverted to the author.

Many people get involved in auction selling out of curiosity -- could I sell this rather than throw it out? Then you might get hooked on the social and collectible aspect, both selling and buying a few things a month, with the sales helping to finance the purchases. It's a more or less expensive hobby.

Then at some point, imperceptibly, the hobby starts to become more like a business. You find yourself buying things at thrift stores and yard sales because you know they'd do well in online auctions. You find yourself beginning to depend on the flow of money that comes in from your auctions.

Then you one day you realize that you're probably making more from auctions than your friends are at their office jobs. After a moment of prideful joy, it suddenly occurs to you that you may be liable for taxes. But you haven't been keeping track of your revenue and expenses. You haven't been saving receipts. And you haven't set aside any money to pay taxes. Yikes!

According to SaleHoo, Some people misunderstand the "moratorium on Internet taxes." That just means that Congress, for the moment, has agreed not to impose any new taxes. But existing taxes still apply -- that includes income tax and also sales tax when the buyer lives in the state you do. The money you get from online auction sales is not "free money"

A reader recently asked me about procedures for applying for a merchant credit card account, so she could accept credit card payments for her auction sales. She was confused because the credit service company she first contacted asked her for information about her sales, expenses, etc. In fact, she had been averaging about $300 to $400 a week for about six months, but hadn't kept any receipts for her expenses (e.g., purchases from thrift stores and retailers). She asked "How can I provide accurate information or is there a better way to obtain a merchant account? I want this under my social security number and would opt not to have a business name at this time. I thought under the laws that Internet sales were not taxable and exempt from reported earned income. If that is true why would the credit card company need all the financials? And will this be turned into the IRS? I just want to be able to accept credit cards on-line, period!"

First, and most important -- income is income is income, and income is always taxable, by both the feds and the state. You are required to report all income on your income tax returns (Form C). And to be able to prove the accuracy of what you report, you must save receipts and keep careful records.

Also, if you sell items to people who live in the same state or city as you, and your state and/or city have sales taxes, you should register to collect that tax, and insist that those customers to pay it to you. For the moment, there does not seem to be a requirement to collect sales tax on online auction sales when the buyer lives in a different state. But due to pressure from brick-and-mortar stores that feel at risk from Internet sales, that may change at some point.

There may be a delay before the Federal government and the states start going after people for income taxes and sales taxes from online auctions. But it will happen. And when it does, there will be penalties, and you could find yourself in a very awkward position. The IRS will have access to the data that eBay and other auction sites keep about everything you sold and what you sold it for. And you will have to explain why you didn't report any of this, even though the money coming in was equivalent to what some people make in regular jobs. And if you can't document your expenses, you will be liable for taxes on the full amount of the auction sales.

If you are in this position, begin keeping careful records now, and do your best to reconstruct records of everything you've done in the past. 

Next week, we'll provide practical tips of tax-related record keeping.

Other auction articles by Richard Seltzer

Can we help you build an Internet business? Richard Seltzer is an independent Internet writer/speaker/consultant. Click here for details. or send email to seltzer@samizdat.com

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