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DiSabatino CPA Blog

A blog by Michael DiSabatino CPA with topics on Tax Savings, Business, Management and more...

Know the tax rules for selling online

Know the tax rules for selling online

Selling items on eBay and other online auction Web sites has become a very popular way to get rid of unwanted household stuff, as well as a way to turn a little profit. Many users have even started full-time businesses auctioning merchandise on the Web. But like any business venture, selling items in the virtual world has tax implications that are all too real.

From a tax standpoint, casual selling on eBay is essentially the same as holding a garage sale. If you sell an item for less than you paid for it, you cannot deduct the loss. When you sell something for a profit, however, you must report it on your tax return. Long-term gains on the sale of collectibles, such as artwork, antiques, or rare coins, are taxed by as much as 28%.

Profit is the difference between the selling price and your "basis" in the item. In most cases, basis is simply the amount you paid for it. Inherited items generally have a basis equal to their fair market value at the time of receipt. If the basis cannot be documented, it becomes zero, and you pay tax on the entire selling price.

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Preparing Your Business for a Sales/Use Tax Audit

 

Preparing Your Business for a Sales/Use Tax Audit
How to take the bite out of the audit sting

It is no surprise that states audit their small business community as a productive way to increase revenue for their state coffers. Should you receive the dreaded notice of one of these audits, here are some ideas that can make this a more pleasant experience:

  1. Review the sales tax rules. Know the rules in your state and locality. Pay special attention to areas that are not taxed. A quick internet search on sales and use tax audits for your state should yield examples of areas the auditor will focus their resources. Pay attention to the terminology used in these documents. Use the same terminology when talking with the auditor.
  2. Conduct a self-audit. Prior to the arrival of the auditor, audit yourself. Begin with your sales receipts, migrate to capital purchases, and then finish with your bills. Pay special attention to internet sales and purchases you make with your credit card.
  3. The best defense is a good offense. You may find areas in your self-audit where you paid tax when none was due. Perhaps you have production equipment and your energy providers charge you sales tax on all your power. You may be due a sales tax refund for up to three years of this production energy use.
  4. Watch out for capital equipment. The sales tax rules on capital equipment can vary dramatically. Some vendors may be required to collect and send in sales tax on equipment purchases that are not taxable. You must then file to collect a refund.
  5. The expense report trap. An easy way to have the auditor pay for their time is to review your expense reports. Often you do not keep receipts of items purchased at a retail store. An auditor could assess you sales tax on items purchased at Walmart, simply because you did not keep the receipt. This despite the fact that a Walmart retail store always collects sales tax.
  6. It’s not usually taxes on your sales that gets you. Remember, it is not often the collecting and transmitting taxes on your sales that gets attention in an audit, it is the payment of use tax and sales tax purchases you make and potentially overlook.
  7. Pre-determine scope of audit. Prior to the audit please inquire what the scope of the audit will entail. If the timing of the audit will create a hardship, request a time that is better for you and your business. Consider recommending sampling a defined period of time versus a full review of all your records.
  8. Get help. Finally, please consider that you will typically encounter an audit of this type once or twice during your career. The auditor does this every day. So get help as soon as you receive the audit notice.

Remember, all states share information with each other. They know sales and use tax audits of small businesses often generate more income than the state pays their auditor. Knowing this, it is best to be prepared.

We're happy to offer guidance and help you make smart tax decisions.

DiSabatino CPA
Michael DiSabatino
651 Via Alondra Suite 715
Camarillo, CA 93012
Phone: 805-389-7300
ww.sharpcpa.com

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here.  All rights reserved.

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