What The Ebay Seller Must Know About Legal And Tax Issues

One of the most important aspects of running a business is adherence to legal and tax-related issues. No online business can afford to ignore or violate the law, or the "terms and conditions" of the websites it deals with. Retailers who are also sellers on eBay are bound by the operating guidelines laid down by eBay. They must also stay in tune with changes to these terms of business when they come into force, as they are legally binding on both buyer and seller. Doing business by the rules is the best way to benefit from being an eBay seller.

Reporting eBay earnings

A frequent question asked by eBay sellers is whether the profits earned from an eBay business must be reported. US law requires that any profit earned must be reported, because profits are subject to income tax.  This is regardless of whether the eBay seller is selling as a hobby or trying to establish a business. As a general rule, any income is liable for payment of income tax unless the law explicitly states that it is exempt. It is always advisable to do the research to see whether any exemptions apply in your case. eBay earnings are taxable, just as income from garage sales, earnings from gambling, and other sources are taxable.

There is a certain limit on net earnings that requires even self-employed people to file their tax returns. In this instance, the self-employed category includes those who do business for profit. Thus, if an eBay seller intends to profit on eBay, he or she would be considered self-employed. The seller would have to report  earnings by filing Form 1040 along with Schedule C or C-EZ.  Schedule C computes profit or loss; this is detailed in  Form 1040.

Those who are eBay sellers only as a hobby are also liable to pay tax on their earnings. In addition to this, for the hobbyist, only expenses can be written off and losses cannot be deducted.

Are there Tax advantages for eBay sellers?
Being an eBay seller comes with some tax advantages.  Personal expenses are deductible. If the seller has retirement savings plans, they can shield at least a portion of the income from taxes. Family members can be recruited and placed in the lower tax payment bracket. So even though the lowest income from eBay must be reported, the good news is that there are exclusive tax benefits for small business owners.

Non-receipt of a 1099 does not indicate that income need not be reported. Income, regardless of its source, has to be reported. eBay is not an employer, but simply a catalyst in the transaction, and is therefore not responsible for sending a Form 1099 to the IRS.

Should an eBay seller obtain a business license?

This is another relevant question, particularly for a seller who starts out on eBay as a hobby. It is advisable to get the necessary business licenses and permits mandated by the state or city where the retailer lives because these documents will be required for:

• Sales tax exemptions at the time of buying resale stock

• Filing business taxes at the end of the year

If a seller collects sales tax, a Federal tax ID is also required. The forms related to its application can be obtained at the local government office, along with details of the process.

For sellers who buy and resell on eBay, a state seller's permit or license are mandatory. With this permit, the goods bought for resale are not subject to sales tax. However, sales tax has to be charged on these goods if they are sold within the state, and tax income must be remitted to the state tax board. The eBay listing for the seller can be programmed to charge sales tax for buyers within the state. The seller's permit is also necessary while transacting with wholesale merchants, liquidators and while attending retail trade shows, a good source for merchandise.

If the eBay seller goes global, then an import or export license might also be applicable.

It is the seller's responsibility to take care of filing taxes, since eBay is not legally required to report a seller's earnings to the IRS. One of the best options for a retailer starting a new eBay business is to start a sole proprietorship company. If there are partners involved, then a partnership might be feasible.

Important issues that an eBay seller must be wary of

An eBay seller must stay up-to-date about the legal responsibilities that go with their business. Being aware of and taking care of the following issues up front can help avoid crises later on.

• Income tax - As elaborated above, eBay sellers must file Schedule C, as it makes them eligible for tax deductions for the self- employed. It is important to budget for taxes, just like a regular business.
• EBay sellers offer their products through listings on eBay. These listings carry item descriptions. These must be accurate, as they are legally binding on the seller. Any deviation entitles the buyer to a full refund.
• The seller's terms and conditions must be laid out in simple and easy to understand language, and must include exactly what the seller can or cannot do, and what the buyer can expect. Some sellers tend to post extremely lengthy terms of sale that can deter a prospective buyer.
• EBay sellers who use drop shipping cannot control their inventory and therefore, must be cautious about being able to stick to the committed delivery time after the auction ends. This means maintaining regular interaction with the drop shipper and the current stock availability. If not sure about items in stock, a message along the lines of "subject to availability" must be included with item description.

• Ethical sales procedures must be followed. There are sellers that rope in bidders just to raise the price of an item for its sellers. This is similar to fraud. EBay detects these unethical patterns, and sellers involved in these scams could be subject to prosecution under the law. Therefore, sellers must be careful not to get involved in unscrupulous methods themselves and to avoid teaming up with an unscrupulous partner.

eBay is a great marketplace for retailers. Keeping the legal and tax issues in view can make a seller's experience a profitable one.