Tax pitfalls in online trading

Both commercial and private sales via eBay, amazon & Co. are rife with tax pitfalls, as several recent rulings and administrative instructions prove.

When selling goods via Internet trading platforms such as eBay, amazon & Co., numerous tax pitfalls lurk. Of course, this affects entrepreneurs who have to deal with the tax aspects of online trading anyway. But private individuals who want to liquidate a collection or sell a large number of items for other reasons are also threatened with trouble from the tax office.

The Karlsruhe Higher Tax Authority, for example, points out that professional traders often under-calculate and under-declare the proceeds subject to VAT. The reason for this is the sales fees that the trading platforms regularly offset against the sales proceeds. Only the amount reduced by the fees is then paid out. Anyone who only recognizes this amount for VAT purposes is therefore underreporting the proceeds.

For sales tax, always apply the full sales price paid by the buyer. Offsetting against fees does not play a role. Fees for payment processing at PayPal and other service providers also have no influence on the sales proceeds subject to sales tax. These only affect the profit and are to be recorded as a normal expense in the incidental costs of monetary transactions.

In the case of sales fees, there is a second tax trap lurking that must be taken into account in the VAT return: If the fees are invoiced by a company that is based in another EU member state - which is the case with eBay and amazon, among others - a reverse charge applies. The merchant must therefore also calculate the sales tax on the sales fees itself and pay it to the tax office. If the requirements for input tax deduction are met, however, the payment obligation is cancelled out with the input tax deduction that is possible at the same time.

A trap of a different kind threatens private individuals and entrepreneurs who want to sell private property. In two independent cases, the German Federal Fiscal Court (Bundesfinanzhof) and the Cologne Fiscal Court (Finanzgericht Köln) have each classified the sale of a private collection via eBay as an entrepreneurial activity. As a result, both sellers had to pay VAT on their sales proceeds and, in one case, income tax.

In the case that the Cologne Fiscal Court had to rule on, it was the enormous volume of sales that made the decision easy for the judges: Here, the plaintiff essentially made his living by selling beer mats from his father's private collection via eBay, generating annual sales of between 18,000 and 66,000 euros.

For at least seven years, he continued the collection through acquisitions and sold only duplicate copies in well over 30,000 sales. In the opinion of the court, the tax office here rightly estimated the profit achieved at 20% of sales and at the same time assessed sales tax.

Less clear and thus much more problematic for other taxpayers is the case that came before the Federal Fiscal Court. There, a self-employed financial advisor had sold at least 140 fur coats via eBay within two years, which were supposed to come from her mother-in-law's household liquidation. When the tax office got wind of the sales through an anonymous advertisement, it assessed sales tax on the sales proceeds of around 90,000 euros because it saw an entrepreneurial activity.

While the seller was successful in the first instance with her complaint against the tax assessment, the Federal Fiscal Court ruled in favor of the tax office. The court came to the conclusion that the sale had nothing to do with the activity of a private collector, because the seller did not sell her own fur coats, but those of others, even if they were the property of a family member. Furthermore, fur coats are not collectors' items, but articles of daily use, which also plays a role.

Unfortunately, the Federal Fiscal Court does not provide any specific criteria as to when a taxable entrepreneurial activity exists. It only states in general that a relevant assessment criterion is that the owner takes active steps to market by using similar means as a producer, trader or service provider. Such actions do not normally occur as part of the management of private property, so that the sale in such a case cannot be considered a mere exercise of the right of ownership by its owner. The duration of the period over which sales are made, the number of customers and the amount of revenue are also relevant in assessing the individual case and may be taken into account, along with other considerations, in this examination.

However, the biggest problem with the ruling - at least for entrepreneurs - is that the Federal Fiscal Court also refers in its ruling to a decision of the European Court of Justice, according to which a taxpayer who carries out a main activity that is subject to VAT is also to be regarded as a taxpayer for any other economic activity carried out occasionally. This view goes far beyond national VAT law and the previous handling by the tax authorities. However, the Federal Fiscal Court left open to what extent this decision is relevant for private sales via eBay & Co. and only hinted that it might be relevant in another case where the tax liability does not already result from other circumstances.

The Berlin-Brandenburg Fiscal Court has become more specific in this regard, having already explicitly referred to the ruling of the European Court of Justice in the case of another eBay trader and subjecting the sales to VAT. Anyone who is already considered an entrepreneur on the basis of an activity carried out elsewhere is also an entrepreneur in the case of further economic activities carried out only occasionally. For the court it was clear that it does not contradict the entrepreneurial status if the trader has acquired the object of sale with his private means.

In addition to the criterion explicitly mentioned by the Federal Fiscal Court, i.e. whether the conduct is typical for a trader, it also ultimately depends on whether the seller is already engaged in a main entrepreneurial activity, whether he is selling a genuine collection or only items without any recognizable connection, and whether he has purchased and collected the items sold himself or whether they are the property of others.

Either way, it is definitely not a good strategy to bury your head in the sand and hope that the tax office won't find out about the sales. The Lower Saxony Tax Court recently ruled that a request for information from the tax authorities is lawful. With the request for information, the Tax Office for Investigations and Criminal Matters wanted eBay to provide a list of which users had generated sales revenues of more than 17,500 euros per year and detailed information about the users and the items sold.

Because the website is not operated by the German subsidiary, but by the Luxembourg parent company, the tax office had initially failed because eBay had successfully invoked a non-disclosure agreement with the parent company. However, in the appeal, the Federal Fiscal Court considered this purely private-law agreement to be an insufficient reason and referred the matter back to the Fiscal Court, which has now ruled in favor of the tax office.