After all the hard work you put into building your Auctiva Commerce Store, you're hoping several people will stroll through its virtual aisles and you'll make some well-deserved cash. After all, it only seems fair. You've done the work, now you should reap the rewards. But with profits come income and with income comes the possibility—and probability—of taxes.
If you're more than a little intimidated by the idea of navigating the tortuous labyrinth that is the U.S. tax code, you're not alone. In fact, many online sellers wonder if they need to report taxes for the goods they sell, and if they should charge sales tax in their Web stores.
And if you're one of the many who weren't even aware you should be concerned about taxes, relative to your Auctiva Commerce Store, no need to panic. We'll give you some insight into the mystery of online selling and taxes. You never want to find yourself in a dispute with the government.
If you made a profit selling online at least three out of the last five years, the IRS will consider it a business
The basics
Before we get started, please note that while we have put every effort into providing the most accurate information possible for this article, we are not tax professionals. We, therefore, encourage you to consult a tax professional in your area to get the most up-to-date information for your specific situation. This article is merely an overview to give you a better understanding of taxes and how they generally apply to your Auctiva Commerce Store.
Now that we have the legal mumbo jumbo out of the way, let's get down to "taxing" matters.
When it comes right down to it, reporting taxes is all about profits. You should report the earnings from your Auctiva Commerce Store if you make a profit selling your goods—and hopefully you are making a profit. You may think of selling online as just something you do for fun, but the government will consider it a business if it has made you a profit at least three out of the last five years.
Here's another way to tell where you're likely to stand with the IRS. Ask yourself the following questions:
- Are you putting a lot of time into your store with the intention to make a profit?
- Do you depend on the revenue generated from your store to pay bills?
- Although your store is probably fairly new, have you adjusted the way you operate it to increase your profits?
- Have you made a profit with a similar business in the past?
- Can you expect to make a profit in the future from the appreciation of the assets you use in your store?
Although your Store is fairly new, if you can answer "yes" to these, odds are you do indeed have a business—and you should be ready to report your earnings when tax season rolls around again.
So if you sell items for more than you paid, report this. However, if you're using your store to sell some unwanted items for less than you bought them for, you don't need to worry about reporting that income, since it will be a loss. Nor are you required to report earnings from items you used for personal use and then sold.
Remember, also, to keep a good record of your store-related expenses, such as receipts for inventory, shipping supplies, etc. If you're going to be reporting your earnings like a business, you can also claim these as deductions. Just be sure these deductions really have to do with your business and you're not just throwing in receipts for personal expenses.
Currently, merchants only have to collect sales tax from customers who live in the same state they do
To tax, or not to tax
Now, what about adding sales tax to the items you sell online? Some merchants do it; others don't. What are you required, by law, to do? The simple—and not-so-simple—answer is, it depends on where you live, and where your buyer lives.
If you live in a state that charges sales tax, you should make sure your Auctiva Commerce Store has a tax code and tax rules in place. Without both, you won't be able to charge sales tax.
To set these up, go into your admin site, click the Store tab, then click "Taxes." Once you're in your Tax Code page, just name the code. For example, you might call your tax code "U.S. tax" or "Calif tax." In your Tax Rule page, fill out the Add Tax Rule box by entering a name for the rule (e.g., "State Tax"), specifying a country and state, and entering a tax rate. You'll then want to decide if you'll tax customers based on their shipping or billing address. For more information on setting up tax rules, see Auctiva Commerce's tutorial.
Currently, merchants only have to collect sales tax from customers who live in the same state they do. However, numerous bills aim to change this so all but the smallest merchants will be required to collect sales tax, regardless of where they or their customers reside. With so much debate on this question, it might just be easier to set up a tax rule in your Store if you live in a state that charges sales tax.
And keep in mind that if you have a warehouse in another state (let's say you use a drop-shipper), you should collect applicable taxes. In that instance, you should set up another tax rule to charge the sales tax in that state.
Setting tax reports in your Auctiva Commerce Store will also make it easier for you to keep track of your earnings, as will keeping your personal and professional accounts separate. For more information about creating tax reports, check out Auctiva Commerce's tutorial.
If you're an international seller, keep in mind that many countries require merchants to collect a value added tax or goods and services tax. For example, if you're located in the U.K. and sell an item to someone in Canada, you should add VAT. The same is true for a U.S. seller who sells an item to someone in the European Union, Mexico, Australia, Canada and other countries. These tax rates vary so you should consult a tax professional.
Anything having to do with taxes may seem daunting, but it doesn't have to be. It's always a good idea to get professional tax advice, tailored to your business needs. But hopefully now you feel better equipped to tackle the issue.