When Do I Charge Sales Taxes?

Registering for Sales Taxes When You Sell on eBay

Q: "If someone has been selling on eBay as a hobby and wants to get a sales tax number to sell as a business with a new name, should the person first take all their auctions off eBay, and if so, for how long? In my state, the rules for applying for a resale license say that you should not be conducting business for twenty days prior to applying for the resale license, and they warn that you could be fined up to $10,000 if you engage in business before you get the license, which takes approximately twenty days. I imagine a lot of people in this situation would just apply for the resale license and leave their eBay auctions going, but I'm wondering if there's a better answer about what to do."

A: First, some basics. When you are selling stuff on eBay, you are required to register with your state tax authority to collect and pay sales taxes. When you register, you are issued a document that, depending on the state, is called a sales tax permit, a business license, a resale license, or a certificate of authority. The name on the document doesn't matter. What's important is the tax ID number, or resale number, that appears on the document. That number must appear on all sales tax and other tax returns you file with your state tax authority.

It doesn't matter whether you treat your eBay selling as a hobby or a business. When you sell stuff on eBay (or, indeed, anywhere on the Internet) to people who are residents of the same state you live in, you are required to collect and pay sales taxes (unless, of course, your state doesn't have a sales tax). Frankly, your sales on eBay right now might be in violation of that requirement—if you have sold anything on eBay to people living in your state, you are subject to the $10,000 penalty for doing business without a sales tax permit.

You are correct that most people in your situation would just apply for the sales tax permit, pay their sales taxes going forward, and not worry about their closed or pending eBay listings. Most people would not willingly pay the $10,000 penalty, even if they could afford it, for fear of "waking a sleeping dog" at the state tax authority and triggering a broader audit of their personal and business finances.

I recommend that you review your past eBay sales and, if there were any sales to residents of your state, calculate and pay the sales tax for those in-state listings to your state tax authority as soon as you have obtained your sales tax permit. It is unlikely that your state tax authority will inquire whether you were actually in business for prior years, although this may come up if you are ever audited. Even if they do discover your prior activity during an audit, by reporting your past sales and paying taxes on them this year you will stop the accruing of interest and penalties on the overdue taxes; you will pay these only for the prior year(s) for which you did not report them. However, if the $10,000 is a flat penalty (i.e., not dependent on the actual amount of taxes), you probably will still be liable for that. By demonstrating to your state tax authority that your intentions are basically good and you are struggling to do things the right way, it is much more likely that they will be lenient with you and work out a payment schedule or some other method by which you can pay the penalty without shutting down your business.

The problem here is that the punishment does not fit the crime. Many of these penalties were enacted into law a long time ago—before the Internet and e-commerce. If you owe your state tax authority only $100 in back taxes, then a $10,000 penalty is simply ridiculous. Seek some expert advice here—talk to a tax accountant or lawyer who deals with your state tax authority on a regular basis. It may well be that your state tax authority routinely forgives the penalty in situations like this and, if that's the case, then coming clean now would be to your advantage.

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