The web has an absolute mess of information on taxation of digital goods. Does anyone have a simple answer to whether I need to worry about sales tax if I’m selling digital media online (specifically, stock art images that people may licenses to use digitally or to print on products once they’ve bought the license)?
Since different states have different laws, how am I supposed to know whether a user is downloading in one state or another? Or in another country? (I live in Massachusetts, USA.) I know I have to declare income at a certain point… ($400?) But is that per year (i.e. do I not have to declare it if I make under $400/yr every year), or just any time I reach the sum? What about money that comes in, but that I re-invest in the business (e.g. by hiring contractors on eLance, or paying for advertising)? Can I do that without declaring it income?
What if I pay someone to help. Is it their job to declare that as income, not mine? eLance takes care of these things but they charge 9% interest for all jobs…
I can’t comment on physical vs. digital goods. Comments mostly on the second and after paragraphs.
Normally in the past, no tax is assessed by the seller, but the buyer is supposed to pay a “use tax.” Most people do not, but they are supposed to. If the physical store is in the same state as the buyer, a normal sales tax is assessed (dollar amount is identical to use tax). However, big retailers like Amazon have avoided having to report unless the buyer is in the same location as their phyiscal store (generally a small state like Delaware). The state governments cracked down on them and they assess on all states that require this and have sales tax. De facto, smaller retailers don’t do this.
Yes, $400 gross, per year. If you have gross receipts in excess that, you may reduce it by your expenses on Sch. C, but you can’t say receive $1000 and spend $700, and avoid reporting. Employees should probably get a 1099.
You would know their location by where you ship to.
This is true only if they pay by cash mailed to the seller. And even then, they buyer gets a postmark on the seller’s envelope. If the buyer is paying over the internet, then the seller has PayPal account info for the buyer, or credit card info for the buyer. I’ve downloaded software before, and the seller does ask for a billing address for my credit card.
You’re only subject to the laws of the states in which your business has nexus, and that is probably only the state that you live in for a situation like yours. However, nexus can be established in multiple states if you have employees, offices, warehouses, representatives, etc. located there. Every state has its own rules for nexus, but most of them boil down to some kind of physical presence.