A Guide to Taxes for Online Auction Sellers

Sales Taxes, Income Taxes, VAT Taxes for Amazon, eBay, and Etsy Sellers

Tax Information for Online Sellers
Tax Information for Online Auction Sellers. Janie Aurey/Getty Images

Everyone seems to be selling online these days. I talk to online auction sellers from sites like Amazon, eBay, and Etsy, and many sellers are confused about taxes. Yes, most of the confusion has to do with sales taxes, but don't forget income taxes. And what about selling abroad? And what is a1099-K?

We'll look at of these taxes in this article to help you make sense of the confusion, so you can get going on selling online.

Note that this information is for online sellers based in the U.S. 

Is Your Selling a Business or "Casual Sales" or a Hobby

Whether your business is a "real" business or a hobby has implications for deducting expenses, but not for sales taxes and income taxes. Whether your business is just for fun, or it's turned into a full-time business: 

  • Your business income must be reported to the IRS and state taxing agencies,  
  • You must collect, report, and pay sales taxes on your online auction sales, AND
  • You must report foreign sales through your business tax return. 

Income Tax Registration Before You Sell Online

Different online selling platforms handle taxes differently. 

  • eBay says it's just a "facilitator," and it doesn't track sales for either income tax or sales tax purposes. That doesn't mean you can avoid these taxes; it just makes it your responsibility to keep good records and pay taxes when they are due. 
  • Amazon requires all sellers to complete an income tax identification form (Form W-9 for U.S. sellers), with information about your tax identification number. This is for the purpose of filing Form 1099-K (more below). 
  • Etsy says sellers are responsible for their own income tax reporting. Etsy doesn't require you to complete a W-9 form, nor do they send information about your annual income on Etsy to the IRS. If you get over a certain level of sales dollars or number of sales, they will collect tax ID information from you. 

    No matter which online auction site you are using, you will need to register to collect sales taxes, by contacting the tax department in the state where you are located. 

    Online Selling and Sales Taxes

    Sales taxes are complicated. Partly this comes from your status as an online seller rather than a "bricks and mortar" storefront. The complication is also because sales taxes differ from state to state, and for localities within a state. One state might have dozens of different sales tax amounts.  

    Every business that sells taxable products (that's most everything) and services (varies by state) must collect, report, and pay sales taxes. You must have a tax presence (called a nexus) in a state in order to be under the sales tax regulations of that state. In general, unless your online selling business has a nexus in a state, you don't have to collect sales taxes unless you sell to someone in the state. 

    The major online auction sites do provide some help with sales taxes.

    • Etsy allows you to set your own sales tax rates within your store. But you have to know what your rates are first.
    • Amazon will calculate state and local, sales and use taxes on your sales. 
    • On eBay, you can set up a tax table and enter sales tax rates. But you have to know the states where you want to collect sales tax, and the rates. 

      For more detailed information on tax nexus, how to apply for an account, and how to collect, report, and pay taxes, see my comprehensive article on the 5 Steps to Getting Started with Sales Taxes.

      Sales Tax Apps to Make Your Life Simpler

      If you are selling many products on any of the online auction sites or you are using Fulfillment by Amazon (FBA), the best solution for sales tax is probably an app. Online apps like Avalara and TaxJar connect to your online seller account and automatically calculate the sales taxes for you. Yes, they all have a monthly fee, but it's worth it to avoid the hassle of trying to figure out sales taxes.

      Online Selling and Income Taxes

      You must report all income from selling through an online auction site, to the IRS and your state. You will probably be using Schedule C, which is included with your personal tax return.

       

      One important part of your Schedule C that you'll need to pay attention to for your online selling business is Cost of Goods Sold. You must keep track of the cost of items you sell (a difficult proposition if you are selling used goods). But it's important to keep track of the cost, in order reduce your income. 

      For more information, see this article about including the cost of goods sold on your business tax return.

      Online Selling and Foreign Sales Income

      Many online sellers who are doing well have significant sales from outside the U.S. That means you must track those sales and pay income taxes on them. The IRS says you must "report your worldwide income including online auctions sales to foreign customers on your U.S. tax return."

      How to report foreign income. You must first collect information on those sales and then report this income separately on your Schedule C. William Perez, Tax Planning Expert, provides information on how to include foreign income on your tax return

      VAT Taxes for Sales to the EU

      If you sell items to customers in the European Union, you may need to charge VAT taxes on the items you sell. Etsy has a good review of VAT taxes and how they work. 

      Online Selling and Form 1099-K

      You may have seen on your online selling site a mention of Form 1099-K. Banks and other entities like PayPal are required to report large payment transactions to the IRS, on Form 1099-K. All of the online auction sites are included in this requirement. If you have sales over $20,000 in one year, or meet some other requirement (for Etsy, for example, it's 200 sales a year), these sites will ask you to provide information on your tax identification number. This information will be used to report your income to the IRS on Form 1099-K. 

      Other Taxes Related to Online Selling

      In addition to the main taxes discussed above, there may be other tax consequences to your online selling business, including:

      Record Keeping for Online Sellers

      Some things to remember about keeping records for your online selling business, to make your life easier at tax time. 

      1. Keep all payment reports from auction sites. You might want to enter them into a spreadsheet or your accounting system. Separate foreign sales. You will need this income record at tax time.

      2. Separate out all deductions, including selling fees, sales taxes, and refunds, and keep running totals on these deductions for tax time.  

      3. Keep track of the cost of items sold, to your best ability. Reporting cost of goods sold will help you reduce your business taxes. All costs associated with your sales should be tracked, including:

      • Shipping costs and auction seller fees for shipping
      • Monthly costs for sales tax apps and monthly online auction service fees
      • Shipping supplies, labels, and packaging material
      • Costs for special delivery services.

      The more legitimate costs you can track, the more expenses you can deduct.

      4. Keep track of the inventory of your products, and the changes from January 1 to December 31 each year.

      5. Keep track of sales taxes collected, and send in reports to your state tax agency as required. 

      6. Finally, if you are working from home, you may be able to take a tax deduction for the use of your home business space. Keep records of property information for this purpose. 

      More Information  

      For more information about online auction selling and taxes, see these 2 IRS web pages: