Probably one of the most confusing aspects for auction sellers and online retailers is their tax liability and responsibility for selling online. Whether you are a hobbyist/crafter selling on Etsy, or a small to medium enterprise selling online across multiple states, your tax liability will vary according to your particular situation.
If you sell online as a hobby, it is still considered income and you will need to report the income to the IRS – regardless of where you sell the items to (within the U.S. or to foreigners outside the U.S.). This not only impacts your sales tax, but affects your income tax as well as possible tax deductions (e.g., for a home office that you use to conduct your auction business). Generally, there is no need to collect sales taxes for small operators (such as auction sellers). If you have under $1 million in annual sales from online sources, you may not need to collect sales taxes. However, you will need to confirm the state laws within your own state.
Small Online Business Retailers
Again, if you sell less than $1 million in online retail, you will not need to collect sales taxes (from any sales except possibly your own state). Note that Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon do not have state sales taxes. However, if you are a chain operation with locations across the country in multiple states and you sell online, you will need to collect sales taxes in all states where you have a physical presence (whether it’s warehousing, storefronts or offices). If you sell more than $1 million in online sales, you are required to collect sales tax for those online sales and remit them in the states where you have a physical location.
Free Online Sales
At the Federal level, the Marketplace Fairness Act of 2013 (which passed the Senate and is still awaiting passage in Congress) would allow States to enact their own legislation to collect taxes from out-of-state sellers, and put a stop to the ‘free taxation zones’ that are currently available for businesses with large online sales operations and a small physical imprint. Note that some states already have similar regulations for out-of-state sellers – and that list is growing, as states continue to look for additional revenue sources.
If you have significant online sales or plan to expand into this area, it would be wise to make sure you are collecting all the taxes necessary to avoid penalties and fines from local state authorities. You must also make sure to report all your income from all sources on your Federal tax return, to avoid larger fees and penalties from the IRS. Often times, the best way to do this is to hire a professional tax consultant.