The Internet has enriched our lives and made some things easier, but it didn’t make life simpler especially for those with virtual businesses. I recently wrote an article regarding e-commerce tax issues entitled “The E-Commerce Conundrum: Taxing Virtual Businesses and Their Investors and the Law” explaining that e-commerce businesses not only face IRS tax problems but also pressure from state legislatures to collect and pay state taxes.
Advances in technology including access to wireless internet connections have created new business opportunities such as virtual worldwide retail spaces for thousands of proprietors who now can sell their talents on the Internet with sites such as eBay, Amazon, and Etsy. These consumer-to-consumer internet shopping websites sell a variety of goods ranging from camping gear and jewelry to electronics and original fine art.
The explosion of e-commerce businesses has been due in part to the low-cost of entry. Many claim it’s resulted in a small-business renaissance with larger corporations in search of market share and start-up investment firms such as Kickstarter ready to provide capital to those who never thought it was possible to make their hobby into a full-fledged profit-making business venture. But lagging behind has been government regulation of not only the proprietors selling their goods but also the marketplace sites themselves. Virtual business owners are now forced to adapt to constantly changing taxation demands and government attempts to capture tax revenue from e-commerce transactions.
Here are questions on this subject that will need to be answered sooner rather than later:
Is the Taxing of e-Commerce Businesses and Their Investors Constitutional?
The Constitution has some pretty clear language set up to restrict states’ abilities to regulate interstate commerce. So before any legislation is determined, this question will have to be answered, most likely by the U.S. Supreme Court.
How will a Virtual Businesses without a Nexus be Taxed?
Many virtual businesses don’t have a physical place of business in a specific state to be taxed accordingly. Some lawmakers and tech industry folks believe virtual start-up’s should be given special tax incentives because, the reason those who earn a living without using their car, don’t pollute the atmosphere as much and leave a smaller footprint on the environment.
Would an e-Commerce Sales Tax Chase Out-of-State Customers Away?
Many believe sales tax could be the end of small e-commerce businesses with some municipalities finding out the hard way. The city of Springfield, Illinois, passed the affiliate nexus tax requiring out of state e-commerce businesses selling merchandise to Illinois residents and who advertising locally to charge a 6.25 percent tax and pay it to the state government. Some large e-commerce businesses, including Amazon.com pushed back on such legislation stating it wouldn’t ship to states with steep sales tax. Their gross margin reduces to the point that it’s not worth selling to them.
Is Big Businesses Impacted by e-Commerce Presence?
Big businesses have lobbied for tax help in the form of a tax on companies with an “indirect presence” in the state claiming they were at risk of being undercut by e-commerce companies not charging sales tax in the long run.
IRS tax issues surrounding e-commerce are complicated and bring up questions whether affiliate nexus tax is constitutional. But with states clawing for every tax dollar, they’re likely preparing for a long fight. California projects that it loses several hundred million dollars in tax revenue a year and has passed a law to enact more stringent policies on the companies selling to Californians.
New state tax laws bring new tax problems in figuring out how to enforce the laws. There are several key obstacles that the government has faced with regard to keeping tabs on the e-commerce sector. The IRS has created a special task force to monitor and enforce the following:
- Online payment accounts such as PayPal to access suspicious accounts and audit PayPal records.
- Monitor businesses showing a high volume of customer ratings to determine:
- If the company is doing high volume sales
- If the company is applying appropriate sales taxes when shipping
- Legally check companies’ shipping and sales tax policies posted on their e-tail site to determine whether or not they should be audited. No tax info could reveal non-payment of back taxes.
- Deploy its matching check program giving the IRS access to a company’s credit card transactions to match if they are accounted for on their books.
- Implementation of form 1099s to all customers paying for products and services with a credit card; a paperwork nightmare for the small business person.
Fortunately, the matching program was suspended indefinitely, due to some backlogging concerns. But it’s only a matter of time before the IRS fires up the matching check program again and companies find themselves with tax debt issues. Companies are advised to get their books in order.
The U.S. as a nation is clearly making significant decisions about how or if it wants to define the e-commerce marketplace. As a tax specialist who helps individuals and businesses reconcile past IRS debts, I have yet to see any clients with auditing or legal issues regarding e-commerce laws, mainly because the subject is new. However, one thing is for sure, legal decisions going forward will significantly impact the future of e-commerce. I fully expect to see an increase in e-commerce business owners facing IRS audits and needing IRS tax relief due to unpaid sales taxes, as well as an increase in lawsuits as small businesses try to keep up with the ever-changing, exceedingly complex United States tax code.
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