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eBay Sales Tax Fraud

Possibly some of the most difficult and confusing tax laws that online sellers have to deal with are sales tax laws. Part of what makes these laws such a headache is that they are different for every state, and the nature of your business combined with a particular state’s laws will determine if you have to collect and remit sales tax on purchases made by customers in that state. These determinations must be made for each state, and for any state you do have to collect sales tax in, you first have to register for and receive a permit to do so. Of course, collecting sales tax means that the total the customer pays for your product will be higher, and so you don’t want to collect it if you don’t have to. Unless your goal is to commit eBay sales tax fraud, that is.

When Sales Tax Must Be Collected by Remote Sellers

The key to determining when you have to register to collect and remit sales tax to any given state is figuring out whether or not you have nexus there. Each state defines nexus in its own way, but in all cases, it has to involve a physical presence by your business in the state. This may be in the form of an office, an employee, or simply goods owned by your business stored in a warehouse.

As a remote seller, then, you have to understand where a sales tax obligation exists for your business and take proper steps to ensure you always remain compliant with those states’ sales tax laws. The other important thing to understand about sales tax is that, as a seller, you’re simply the middle man between the customer, who is the one being taxed, and the state, to whom the tax is owed. The money you collect is never actually part of your profit.

Inappropriate Collection of Sales Tax

When you think of sales tax fraud, you likely think of a business or individual not paying that tax when it’s owed. But recent reports claim that there’s another type of sales tax fraud taking place, primarily on eBay. In these instances, both overseas and domestic sellers are charging sales tax on purchases made by customers in those states and then keeping that revenue as profit, whether they have nexus or not in any given state.

The sales tax rates being charged in some instances are much higher than the rates in the states they’re assigned to, and these sellers are often charging the same rate for every state, which is one way to quickly spot a fraudulent sales tax charge. These charges are not immediately visible during the bidding or purchasing process, and the specific details of where these sellers are charging sales tax and at what rates are only available if you dig down into their profile.

Who Suffers the Consequences of eBay Sales Tax Fraud?

Unlike a lawful collector of sales tax who was then unlawfully keeping what they collected, the overseas sellers have no obligation to collect the tax and then remit it to the states. What they’re bringing in does not take away from state sales tax revenue because they’re not obligated to collect.

What this fraudulent collection of sales tax does, however, is make the products these sellers are offering appear cheaper up front than the same or similar products offered by their competitors. In fact, reports state that they’re able to charge a price that would result in them losing money on the sale if they weren’t then keeping the sales tax they also charge.

The customer who makes the purchase, then, doesn’t really get the deal they think they were getting, since the added "sales tax" brings the transaction total closer to what other sellers were offering. This puts other sellers at a disadvantage, of course, and it also has implications for eBay’s own revenues, as they charge transaction fees as a percentage of the purchase price of the item, excluding sales tax and shipping charges.

Finding Solutions

At least some of the onus for correcting the issue of eBay sales tax fraud must lie with eBay itself. This type of fraudulent sales tax collection is not a problem on all ecommerce sites. Amazon, for instance, requires sellers to enter a state sales tax registration number before they can collect sales tax on purchases made by customers in that state. Educating buyers on these types of scams is another way to help eliminate them by letting people know it’s possible to shop for items by the lowest total price, which includes sales tax, and by teaching people how to find out what sales tax rates a particular vendor is charging before they make a purchase.