Legalities

[deb193]

I wanted to ask about a few related questions that I never seen discussed here or on other boards. It has to do with the sales tax, income, and business issues that come up at some point along the spectrum from selling a cab/pendant to a friend to selling on a website like Etsy to selling on one's own website to selling at shows ...

Sorry for a lengthy post, but I have been wondering about these issues for a while, and I have a lot to ask. Over the years I have seen people transition from lapidary hobbyist to lets say an enthusiast who sells on a website or craigslist or something. Some people went on to make it a day job, but I am more curious about that gray area where things are somewhere between hobby and business.

I think I have 4 related/overlapping areas I want to know about:

• sales tax
• income reporting
• registering/licensing/incorporating
• tools

There is the relatively few things I know (or read when I tried to do some research), and then there is all the folks on boards who seem to be selling, and in the gap there seems to no discussion of the practical matters. Even this site has sections for how to promote or how to setup for shows but no section clearly designed for a question like this.

When I was in Pennsylvania, the club held a show, and had to jump through hoops to let members sell stuff. The PA dept of revenue wanted someone from the club listed as a promoter, and to be responsible if any vendors did not collect and forward PA sales tax. The club ended up having a consignment table to serve members who wanted to offer a small amount of self-collected or handmade, or used stuff. The club collected the money, paid the sales tax, and took a small commission.

When I was in Oregon, we had no state sales tax, so selling at a show or club swap-meet was not such an upfront issue. There was no consignment table for members to sell something at the show. I think this is because a lot of members were full time vendors, who were paying booth fees, and there were issues if other members got to sell w/o paying a booth fee. BUT, once or twice a year that was a swap-meet where members traded or sold rock to other members. (I think it was supposed to be self-collected, but I know some folks sometimes offered stuff they had bought if it was more than they could use/wanted. Nobody checked.) I assume that some of the members who were full time vendors may have reported income from sales at club swap-meets along with the rest of their yearly income, but I think the folks who just did this once a year never thought to report the income, and after all it was usually less than $100.

When I got to Kansas, the Topeka club advertised a swap-meet for rocks and fossils. (I assume that slabs and cabs and even jewelry made in the club's shop might also have been fair game, but the flyer did not say.) I asked the guy organizing things and handing out fliers if this was sort of like a once-a-year garage sale and sales tax was a non-issue. He said that, "No. Anyone selling would have to collect and forward sales tax to the Kansas Dept of revenue, and this would require registering first." His answer actually pissed me off a bit because if I had not asked, I might have unknowingly gotten in some kind of trouble. Here I was new to the club and new to the state and they are announcing an opportunity to sell rocks at a swap meet - without even mentioning that sellers would have certain responsibilities.

A while back Sara and I discussed offering a few handmade items at local craft fairs or flea markets or whatever. I found out that the whole "partner thing" raised a whole lot of additional questions. I read Kansas websites about being a sole proprietor, registering a business name, having a home-based business ... etc. It seemed like being a sole proprietor was easy enough. Turned out my town had no ordinance against-home business as long as there were no traffic/parking issues or materials outside the house. Turned out I could register with Kansas Revenue and forward quarterly sales tax, and the only hassle was having to file a $0 report for any quarters without sales. As long as I did not want a business name, the registration was free, and even registering a name was just a few bucks.

I did read that they expected me to record any supplies I purchased from outside Kansas, and pay a "fair use" tax equal to the KS sales tax. Seems they expect everyone to do that, but only ask people registered as vendors to submit a statement on fair use tax. Almost seemed unfair. Maybe I misunderstood.

At the federal level, there seemed to be the opportunity to continue treating this like a hobby, where expenses could not be deducted, or to file as self-employed, where expenses could be deducted, but you could only go so many years (deducting expenses) without making a profit. The details were a little foggy.

The only way that I could see for Sara and I to work together however was a LLC, at several hundred dollars setup expense, and some increased filing difficulty. Plenty of websites were offering packages to set up state and federal tax IDs and draw up/file LLC paperwork, but these sites were trying to sell their services and they were a little skimpy on what you could easily do for yourself, or for that matter, when you actually had to do all this stuff. There seemed to be books on setting up a craft business, but they focused mainly on how to select you products and how to market yourself and how to offer things online - very little information about what local ordinances or state revenue issues to check out.

Working with someone seemed to necessitate an LLC. As I saw it, one entity (the LLC, me, or Sara) had to sign up for the booth or provide tax ID. They do not allow two vendors to share a booth, or for one vendor to sublet the booth. Also, if I had expenses in making something (supplies or equipment) and Sara sold it at a show, there didn't seem to be any way to offset the expense without the LLC. I'm still not clear on all the issues surrounding partners.

Then there was the whole issue of online sales. All kinds of hosting services offering to create a site from a choice of templates, and to include a shopping cart. Some processed payments, some wired-in PayPal, some expected you to have you own VISA account. Also places like Etsy, ebay, LapidaryArtist.org, ArtFire ... etc. Do any of these places help with sales tax issues or brovide tooks to help on the business end? For example, provide reports that could be imported into QUickBooks or something?

At what point (volume/$$$) can you ignore these issues and when do they start to matter? What kind of records need to be kept? I know one old timer on another board who won't use PayPal when he sells rock to another member because he does not want the paper trail. Is he just being paranoid?

Anyway, so many people I know have started to sell on Etsy or ArtFire or their own website. I guess I could ask some of the ones I know better what they did about legalities, but I thought I would start this thread because I did not want to put anyone on the spot if they were operating under the table or something.

So, any knowledge, tips, advice, book recommendations, ... etc would be welcome.

[donsstoneimages]

Unfortunately I have not come across much help when it comes to taxes.  I have a state business tax liscence so for any sales in-state that I do via ebay or etsy, I am required to collect tax on.  Most of my sales are out of state so I dont have to worry about it very often.  I have built a simple excell spreadsheet to keep track of my sales and expences to make reporting on my year end taxes easier.  I only do a couple of shows a year and there is also city taxes to keep track of depending on the city.

[doxallo]

It is my understanding that when you sell online you must collect sales tax when you sell to people within your own state.

Etsy has a sales tax component now that figures it in when you make a sale, you just have to set it up in your account settings. I do not know about other venues as I don't use them. If you have your own website, same thing, you must collect from within your own state - how you go about that will differ depending on what software you use. Some websites simply ask you to add the (blank)% sales tax if you live in the same state.

Have you read up here?
Small Business Administration - http://www.sba.gov/

Good resource and may answer some of your questions.

Also - SCORE
"We are America's premier source of free and confidential small business advice for entrepreneurs. We offer advice online and in-person at one of our 350 offices nationwide"
http://www.score.org/

I'm afraid I don't have much else to offer. I did register as a business about a year ago when I decided I wanted to begin selling. I got a business license and a tax ID number and I keep ALL records. I file quarterly with my state online, it only takes a few moments.

I don't know about LLCs though I know a few people who went that route and it didn't seem like a HUGE ordeal.....

Re: the legalities of hobby vs. business - that varies from state to state. So check with your local business/tax offices. For instance, some states allow you to do so many shows a year and maintain 'hobby' status. Go over that and you need to register. Most shows and events are required to give a list of vendors to the state - and promoters/organizers may allow hobbyists and then they usually hand out one time use sales forms.

That is about the extent of my knowledge - slim pickin's huh?

[doxallo]

ok, I went over to the network forum as we do have a business resource folder there.

You may want to read some of these links:

IRS small business: http://www.irs.ustreas.gov/businesses/small/article/0,,id=99336,00.html
(interesting articles - after reading a bit now I wonder if a 'business' is considered 'any activity with a reasonable expectation of making a profit:.)

My Own Business:
http://www.myownbusiness.org/registration.html  (free course, don't know how encompassing it is)


Work at Home Mom
http://www.thewahmconnection.com/  -- including this as it may have some 'down to earth' and easily understandable language. Since its an 'at home business' focus it may answer a lot of our small business questions

Hope that helps!

[Taogem]

Good stuff Janice !

[doxallo]

 

[Michael S Hoover - Redrummd]

Bottom line is you are a hobbiest if you lose money and a business if you are operating at a profit.   Once you hit about $12,000 in sales a year you do attract attention form IRS and your state tax collection agency.  At some point Ebay and PayPal will be required to report these sales figures so keep it legal.

Keep records of all sales and purchases to be prepared for any audit by the IRS or your local state tax collection agency.

Hobbiest trying to claim to be a business to get a tax rebate run into serious tax issues so do not try to claim to be a business as a hobbiest with some sales unless you can afford to spend thousands for lawyers or you know the tax laws well enough to self represent.

I have over 50K in sales so far this year and will operate at a loss but next year and beyond there will be no way to show a loss and then I need to figure out Social Security payments on top of the State sales tax and IRS rules.

I use Quicken to track everything now and it is pretty easy to use.  I do it only once a month and consolidate all entries, income and expenses into the last day of the month but I do have every receipt or note for cash purchases and sales to spport the records.  it takes about 4 hours a month to keep current.

[legendarygranite]

I don't have any wisdom in this area but love the questions. I hope to see myself looking for the same answers. Great topic.

[doxallo]

In my state you can have a business license, do the taxes etc for only so long without showing some profit margin. I think its 5 years.

[deb193]

I think that 5-year thing may be federal too. On the link you posted, it said that the IRS would consider an enterprise "profitable" if it had a net profit in 3 of past 5 years. The flip side is that if it did not, they would not consider it a profitable enterprise.

This would mean it no longer qualified as a business, where losses could offset income in other areas. As I understand it, you would have to file as a hobby, where some limited expenses could offset income only from the hobby.

Still, as I read this, since I never expect to fully recover the cost of materials, the depreciated cost of equipment, and the costs of marketing, I would always be able to shelter whatever income my hobby generated by showing the costs of the hobby. The only pain is that you have the more complicated filing just to show that you can wipe out the hobby profits. Of course, state sales tax is a seperate issue from income reporting, so this only aplies to the income aspects.

Does that make sense?


Still ... there is a line. Consider someone who is moving and lists 10 items on ebay and makes $500. I doubt they would ever report this as income, and it is not a business because there is no ongoing nature and ongoing expectation of profit. I doubt they would ever be audited or found at fault. But someone else who collects items from family/friends/neighborhood every month to offer 10 items and makes $100/mo ... well they are in a business, and if audited they might be in trouble for not reporting the income.

To put this in lapidary/jewelry terms, I don't think selling a few items to other board members, and receiving money by PayPal would ever amount to income I need to report - even if technically I should. But setting up a website, or joining Etsy, and calling myself "Lackadaisical Lapidary", and selling even just a few items ... well that might be something that could lead to trouble if not done legally and reported - especially if there was a paper trail of the payments.

SO there is some sort of line that separates selling something you made to a friend or friend-of-friend and being an actual vendor. The line seems a bit fuzzy.