They say the only certainties in life are death and taxes, but perhaps a third is that governments will almost always be behind the technological curve in their law-making. Especially as computers, and more so the internet, have taken over nearly every facet of daily life, citizens often find ways to avoid taxation without even intending to!
Sales Tax No-Man’s Land
A classic example happened in the early days of e-commerce. Sales taxes were generally set up to be levied on transactions happening in physical stores. If a retailer didn’t have a brick-and-mortar presence in a state, it didn’t collect sales tax on purchases made by buyers in that state.
What many didn’t realize was that when buying products from a vendor in another state, it was the buyer’s responsibility to declare the purchase and pay a use tax. As you might expect, hardly anyone actually did this; many had no idea they were supposed to do it, and states generally had no mechanism by which to find out if someone was avoiding the use tax in the first place.
This didn’t matter much in the pre-internet shopping environment; if a store didn’t have a location in your state, you simply didn’t buy products from that store, and therefore taxation was a non-issue. Governments didn’t miss out on too much of that out-of-state tax revenue because some of the largest mail-order businesses were Montgomery Wards, JC Penny and Sears. Because those companies had a physical presence in most states, they collected sales tax on catalog orders as well.
All this changed when Amazon came along. Because it was strictly a mail-order company with very little physical presence in most states, it didn’t have to charge sales tax for most of what it sold. Consumers were quick to figure that out and buy from Amazon to save money. This cost advantage was key to Amazon’s rise to retail prominence.
States, of course, wanted in on the tax revenue they were missing due to the shift to online purchasing. Throughout the 90s and early 2000s, laws were passed requiring mail-order companies to collect tax on items they sold, whether they had a store in the state or not. Today, we’re all used to paying sales tax when we buy goods online.
Payment App Confusion
In a modern example of taxation being behind the technological times, payment apps have emerged as a way to buy some goods and services without paying taxes. Companies which accept payments through Venmo and other payment apps are supposed to report that income just as they must report income collected via more traditional methods.
However, this commonly doesn’t happen, and the IRS has taken notice! While the IRS has always required payment settlement companies such as Venmo to report taxable transactions and send 1099-K forms to payment recipients, the dollar amount that triggered reporting was quite high: Only if you received more than $20,000 and more than 200 transactions would Venmo and others have to report the activity.
For the 2023 tax year, that figure is being slashed to $600. That low threshold has people worried: They don’t want to be taxed if they send a friend or family member more than $600 to reimburse them for a trip or other expenses.
The good news is, that shouldn’t happen. The $600 threshold only applies to business transactions; personal payments don’t count. But the bad news is that the new threshold is likely to generate quite a lot of reporting on the part of the payment apps.
Companies such as Venmo, Zelle and others won’t want to run afoul of the IRS’ regulations, so especially if their app does not distinguish between business and personal accounts, they might err on the side of caution and generate reporting for transactions that don’t require it.
This could potentially cause headaches for individuals, at least in the short term. However, I’m confident that these problems will resolve themselves, especially after they begin to surface and the IRS has the opportunity to tweak its requirements to more precisely target actual businesses.
In the meantime, it’s a good idea to keep meticulous records — something you should be doing regardless — of your transactions so that if the worst-case scenario happens and you find yourself on the receiving end of an audit, you won’t have to scramble for the information you need to defend yourself.
At Asset Preservation Wealth & Tax, we regularly help clients prepare iron-clad tax returns that minimize audit risk, and with our tax planning services, we can work to reduce your tax liability so you only pay what you actually owe. We recommend not waiting until April to start thinking about taxes, but rather planning for them year-round. The sooner you begin tax planning, the more likely you are to be able to take advantage of money-saving opportunities.
#IRS #Taxes #Venmo #Zelle #PayPal
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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