Income is Income is Income..

For those of you who are familiar with the Income Tax system in the United States, the title of this post should ring a bell. For those who don't know what it means I'll break it down for you: In this great country of ours, any form of Income you earn is subject to income taxes by good ol' uncle Sam and more than likely his little brother nephew Sam (your respective state of residency). It doesn't matter if this income came in the form of wages from your employer, gambling earnings, or even through illegal means (as evidenced by the hoards of criminals who have had to pay "back taxes" after being sentenced) the government will always want a cut of your "action." So, why is this relevant you may ask? And you also may wonder why I'm talking about something that the majority of Americans already know. But that's just it--a good amount of Americans DON'T know this simple principle, at least in some aspects.
Now, I'm sure any working American realizes that they get taxes taken out of each of their paychecks (if you don't..get a clue) and I'm also sure that anyone who owns a business knows that they must pay income taxes on the profits that their business has produced (and payroll taxes if they employ people). But I ran across an article the other day about online marketplaces such as E-bay and Ubid.com and how a good majority of people don't pay taxes on their gains from sales. The article talks about how the IRS is starting to poke its nose into the vast world of online sales by regular joe's like you and I. It seems that a lot of tax experts are FINALLY noticing after all of these years that the only people who report their online auction income are the POWERsellers who make large enough profits that they are "forced" to because of the fear of being caught. Which is all good, but now the government wants to go after the little guys too, i.e. if you make sales of 5k or greater, or generate 100 transactions in an annual year. They plan to implement this tedious task through some vague-ass federal budget President Bush has decided to propose for 2008. It requires that online brokers provide the IRS with a 1099 Form(which reports income that is earned from non-wage sources such as renting a house, gambling, interest, you get the picture)that provides the government the information it needs to tax the people that fall into the category mentioned earlier for sales. Supposedly, millions and possibly, billions of tax dollars per year are lost by the millions of online sellers who don't report income to the government.
Personally, I don't think the government should waste the time and resources on that amount of income simply because there are a ton of people that fall into that income category on sites such as E-bay. Now you may be thinking, "Uhhhh shouldn't they focus on that benchmark since there ARE a ton of people in that category?" and my rebuttal to this rationale is a stern "NO!" because it would cost so much and require so much more time and effort that the costs would outweigh the benefits. I don't think the limit should be set that low, especially for the folks who sale a lot of low priced goods that would put them in the category of "100 transactions with net sales being $500." To me that is completely ridiculous. Let's break this example down a little more for the hard-of-understanding:

1. Sally sales online salads (or whatever) for $5 a pop on E-bay. Sally does this for fun by the way, not to make serious dough (believe me, there are people like that out there!)

2. In 2006, Sally just so happened to sale 100 of these salads which gave her gross sales of $500. For easiness we'll say that the total cost of her salads was $250 leaving her with a gross margin of $250.

3. Clearly Sally doesn't meet the $5,000 in sales test, but she meets the 100 transactions test. Under the new proposal the IRS has to contact a "broker" who pulls Sally's Tax ID number (her social security #) and amount of income and fills out a 1099 to send back to the IRS so that they can make sure Sally pays her minute amount of tax on these salads!

4. Keep in mind that the broker will probably charge the government on a per person basis, and if they don't, they will either have contract with the government itself (alot of $$$), or the government will require online auction sites to hire brokers which will decrease the amount of users on these sights because no one wants to get taxed on an amount of money that small! Think about it, if YOU were Sally and you knew you were going to be taxed on your online salads, you would probably start making real - life salads for people you know, and not have to worry about being sent 1099s!

5. This goes back to the original point - the costs will outweigh the benefits. These sites will lose a ton of people therefore decreasing the government's tax base while they still incur the fixed costs that go along with implementing this kind of system! So much for shortening the tax gap! Oh and one more thing, they hurt successful companies such as E-bay who help to drive the economy of this country, whether you believe it or not.

The Solution
Contrary to what you may think, I would not be completely against the idea proposed by Bush, but the limit would have to be raised to a higher level where the benefits can outweigh the costs and where it would not drive folks away from the site. Believe me, once you get to a certain point in sales, you are willing to take a tax hit because you know at the end of the day your still bringing in a nice chunk of change. I think a number in the range of 10k-15k would be a good starting point (with no transactions test!) for the issuance of 1099s because there are some idiots that make this amount of money but still refuse to report it to the IRS (Yeah, your an idiot because you will more than likely be audited). Also:
1. Folks who are making this much will not be driven away because they have to start paying tax, i.e. they'll still have handsome after-tax profits.

2. Folks who make less than the minimum benchmark for 1099 issuance will continue to be on the "honor system"--that is, reporting their income on their own free will. Some will report, most won't, but it's not like the government is going to get their money anyway with the current proposal, as noted earlier. Also, business for the online auction sites should remain stable, which will definitely keep them happy.

3. Folks who are considered POWERsellers probably won't care either way, since the vast majority of them properly report and pay their income tax liabilities because most are intelligent enough to know that they draw a lot of attention with their quantity of amount of sales.

I predict that this method would yield the government a marginal amount of increase in tax revenue when actual costs and opportunity costs are taken into effect. It wouldn't hurt us as much as the current proposal would, but if I had to choose I would want to keep things the way they are today. Who knows? Maybe I'm just resistant to change! So there you have it--comments would be great!!!