Academic study

EBay sellers shirk sales tax law

Economists' findings come as states and Congress look for new ways to collect tax on Internet sales.

Sales tax collection compliance among eBay sellers is "alarmingly low," says a new academic study published as states look for ammunition to bolster tax-collection laws.

When Georgia State University Economics Professor James Alm and Mikhail I. Melnik, an assistant professor of economics at Niagara University, downloaded and analyzed data on all consumer electronics sold on eBay ( EBAY - news - people ) during a 24-hour-period in July 2007, they found that only 18% of sellers bothered to collect sales tax even on sales to buyers within their own states. Under current federal law, an online seller has to collect sales taxes on purchases by buyers in his home state, but not on those by buyers from other states in which he has no physical presence, or "nexus." States generally exempt residents who aren't in business and make only "occasional" sales--say at a garage sale--from this requirement.

Not surprisingly, the new study, which appears in the National Tax Journal, found compliance rises dramatically with the size of the merchant. But Melnik said in an interview that he was surprised to find that even among eBay sellers with 10,000 to 15,000 ratings--meaning they have had that many unique customers and hardly qualify as "occasional" sellers--only half bothered to collect sales taxes on in-state sales. "They appear to be real businesses who have decided deliberately not to comply with state sales tax,'' Melnik said. "That's a violation of law." (EBay gives all sellers the option of having sales taxes included when the final purchase price is calculated, allowing the researchers to determine whether the taxes were being charged although not whether the taxes collected were actually remitted to the states.)

Melnik said it seems likely some merchants who aren't collecting in-state sales taxes aren't complying with income tax laws either. Someone who is buying and selling items as a business (even a side business) on eBay would normally report it on a Schedule C attached to his 1040. This provides better tax treatment than is afforded hobbyists selling on eBay, who legally must report their sales, but can only deduct their expenses as miscellaneous itemized deductions.

But nonreporting of eBay sales is apparently widespread. For example, in April, a U.S. Tax Court judge ruled an Internal Revenue Service revenue officer was liable for back taxes from thousands of eBay clothing sales that she hadn't reported on her tax forms.

Beginning in 2012 (for transactions taking place in 2011 and later) credit card companies and third-party transaction handlers such as eBay and must report to the IRS annually the gross sales of any U.S. seller doing more than 200 transactions and $20,000 in sales per year. Congress passed this requirement in 2008 to help pay for the first-time-home-buyer tax credit.

Meanwhile, the states have been using new laws, enforcement tactics and pressure on Congress to attempt to capture more sales taxes from online sales. New York, North Carolina and Rhode Island have passed novel laws that attempt to force big online out-of-state retailers such as Amazon and to collect their sales taxes based on the location of the companies' affiliate sellers. Those laws are being challenged in court, as is a new Colorado "big brother" law that requires certain out-of-state merchants to either collect the tax or advise customers of their (widely ignored) obligation to pay it over to their state if the merchant doesn't collect it. With state and local sales taxes nationwide now averaging a record 8.6%, billions of dollars in revenue a year are at stake nationwide.

States and bricks and mortar retailers are also lobbying Congress to require collection of sales taxes on cross-border sales. Earlier this month, Rep. Bill Delahunt, D-Mass., introduced the "Main Street Fairness Act," with the backing of the National Conference of State Legislatures and the Retail Industry Leaders Association whose board includes top executives from Best Buy, Wal-Mart, Target, Home Depot, J.C. Penney, Dollar General and PetCo. (These big retailers already collect sales taxes online.)

Delahunt's bill would allow states that agree to simplify their sales tax structures, as two dozen have, to require out-of-state merchants without a physical nexus to collect their sales taxes. The bill would exempt small sellers (with the exact size to be hashed out later) from the collection requirement and would also reimburse merchants an undetermined amount for the compliance costs. It stands little chance of becoming law this year.

EBay offered no comment on the new study, but in an e-mail to Forbes reiterated its opposition to the Delahunt bill, which, it contends, "is sure to harm the economy and kill small-business jobs."

Melnik said the study used data eBay makes publicly available and did not have the cooperation of eBay. Jim Eads, executive director of the Federation of Tax Administrators, a group of state tax officials, said he was "a little surprised" by the extent of in-state sales tax noncompliance the new study found.

Yet despite its focus on in-state sales, the Alm-Melnik study also makes clear that the real gold for revenue-hungry states is to be found by reaching across state lines. During the 24 hours covered by the study, $755,905 worth of consumer electronics were sold on eBay, but only $60,249 of those sales were made between a seller and buyer in the same state.

(Published by Forbes Magazine – July 13, 2010)

latest top stories

subscribe |  contact us |  sponsors |  migalhas in portuguese |  migalhas latinoamérica