Collecting Sales Tax

Here's the question nearly everyone asks: Do I need to collect sales taxes on my eBay sales? The answer is a firm "perhaps."

Part of the answer depends on how much business you do on eBaythat is, whether your eBay sales are part of a steady business or more of an occasional hobby. Not that I'm recommending it, but occasional eBay sellers can probably get by without collecting sales tax, just as most individuals running garage sales fly under the tax radar. When you're running a legitimate dayto-day business, however, there's no sliding by this requirement: You must collect sales tax, and you must report your collections to your state tax authorities. Failure to do so has legal implications.

Of course, just what sales taxes you collect depends on the state in which you live. If your state has a state sales tax (and all but Alaska, Delaware, Montana, New Hampshire, and Oregon do), you'll need to charge sales tax on all sales made to buyers who live in the same state you do. You do not have to, at this point in time, charge and collect sales tax on sales made to out-of-state or out-of-country buyers.

So, for example, if you live in California, you charge sales tax on all sales made to California residents. If someone from Nevada buys something from you, you don't charge tax.

Of course, when you collect sales tax from a customer, you also have to report and forward that tax to your state government. This procedure varies from state to state, so you'll have to check with your local authorities (or your accountant) to get the appropriate details of how this is donemonthly, quarterly, or whatever. You can also find this information online.

Paying Taxes on Your eBay Income

While we're on the subject of taxes, here's another one you're not going to like. When you're running a legitimate eBay business, you're going to have to report all the money you generate from your eBay sales as income. Failure to report your income is definitely actionable.

Again, if you're just selling a few items a month, the government probably isn't going to come after you for nickels and dimes. (Although it could if it wanted to.) But when you become a high-volume professional seller, your eBay activity is a real businessand real businesses have to pay taxes. That's all there is to it.

If you're running a sole proprietorship, the income you generate from your eBay sales, less any expenses related to those sales, is your business income, which you report on IRS form Schedule C. Your business income then becomes part of the calculation for your personal income tax, which you report on your normal form 1040. (It goes without saying that this process is even more complicated if you're incorporated.)

Unfortunately, keeping track of the taxes you owe is a little more complicated when you're running your own business than it is when you work for someone else. Since you're working for yourself, there's no employer to withhold taxes from your paycheck (what paycheck?); instead, you'll need to estimate and pay these taxes quarterly, using IRS form 1040-ES. (You'll also need to pay state quarterly estimated taxes, using the appropriate state form.) You might as well mark the dates on your calendar nowJune 15, September 15, January 15, and April 15 are the four quarterly payment dates.

Fortunately, most everything you spend money on that's related to your business can be deducted from your taxes as a business expense. And I mean everythingInternet service, your computer, automobile trips to the bank or office supply store, even a fair share of your household utilities (for that portion of your house you use as a home office) may all be legitimate deductions. And the more deductions you have, the lower your reportable income for tax purposes.

Withholding Employee Tax

Depending on the size and complexity of your eBay business, you may need to worry about one more type of tax. If you have employees working for you in your eBay business, you'll need to withhold income tax from their paychecks, and then report and pay this tax to the state and federal government. This is actually a fairly complicated process, and not for the numerically challengedyet another good reason to employ the services of a qualified accountant.