The convenience, ability to cost compare, and wider selection are a few of the reasons why online sales have exploded in recent years.
COVID-19 has further contributed to the already-stressed traditional brick-and-mortar shopping experience, as retailers – including sellers who’ve never been in the retail business – find ways to sell everyday household items, from jewelry, makeup, and clothing through easily accessible online platforms such as Facebook Live.
These days, if you are a part of a Facebook sales group, it seems your newsfeed is constantly flooded with sellers selling their retail items at all hours of the day and night, as the majority of people work and shop from the comfort of their homes. It’s a dynamic and engaging process, as you witness in real time shoppers across the nation, and possibly from other parts of the world, make purchases by claiming products, following up with some method of online payment, and shortly after, receiving their products at their doorstep.
Sellers can make sizable profits because of their wide reach and low overhead costs, while buyers are satisfied with their purchases and the sheer entertainment and convenience of the purchasing process.
However, sellers and buyers – especially boutique owners who, during the days of COVID-19, only recently started selling through Facebook Live and similar platforms – may not be aware of the legal and tax requirements associated with retail sales. Those requirements may include
obtaining a seller’s permit;
assessing, collecting, and remitting sales and use taxes;
registering and reporting as a remote seller; and
reporting income tax obligations.
In the days prior to live online sales, it was easy to assess whether a business needed to obtain a seller’s permit and collect and remit sales and use taxes. While these requirements still apply to Facebook Live sales, the informality, accessibility, and lack of oversight over these platforms may cause sellers and buyers to overlook these requirements, which may later result in significant consequences.
In Wisconsin, a seller’s permit is required for every individual and business making retail sales, if those sales are not exempt from sales or use taxes.1 Wholesalers, manufacturers, or other businesses not making direct sales to a consumer are exempt and not required to apply for a seller’s permit.
Additional exempt sales are “occasional sales” by sellers with less than $2,000 in taxable sales in a year. By bringing in less than $2,000 annually, they are presumed to not be actively pursuing the business or vocation. Note, however, that if a seller exceeds $2,000 in taxable sales in a year, that seller may be liable for all taxable sales, including the first $2,000 in sales.
Sales and Use Taxes
To understand a seller’s or buyer’s retail sales tax responsibility, it is important to understand the difference between sales and use taxes.
The Wisconsin sales tax is 5% of the sales price of the retail item, usually collected by the seller at the time of the sale. Sixty-eight counties in Wisconsin impose an additional 0.5% county tax on the sales of retail items, which must also be assessed and collected by the seller at the time of the sale if the retail item is shipped to a county imposing the county tax. The seller is then responsible for later reporting and remitting the total sales tax collected to the Wisconsin Department of Revenue.
Wisconsin use taxes are also 5% or 5.5%. If they are assessed within one of the 68 counties imposing the county tax, they are due not by sellers, but by buyers who use, store, or consume a retail item within Wisconsin in which a sales tax has not been paid.
Sales and use tax liability also apply to remote sellers, who are out-of-state sellers with no physical connection or other activities in Wisconsin other than making sales, primarily through the internet.
As of Oct. 1, 2018, remote sellers are required to register, collect, and remit sales and use taxes in Wisconsin, unless the remote seller qualifies as a “small seller exception.” Small seller exceptions apply to remote sellers who
have less than $100,000 in annual taxable sales; or
process less than 200 separate transactions annually.
For purpose of who qualifies as a small seller exception, a transaction is one invoice, even if that invoice includes the purchase of more than one product.
All remote sellers, except those who qualify as small sellers, are required to collect and remit sales and use taxes on all taxable retail products, including online sales, unless an exemption such as mentioned above applies (e.g., exemptions for wholesalers, manufacturers, other businesses not making direct sales to consumers).
Income Reporting Obligations
If sellers make enough money to require filing taxes, they must also report income derived through Facebook Live sales as taxable federal and state income. The threshold for filing depends on the year and the seller’s filing status as single, married filing jointly, married filing separately, or head of household for that year.
While that threshold differs on an annual basis, Interactive Tax Assistance provided by the United States Internal Revenue Service can help determine whether a seller should file taxes based on income and filing status in a specific year.
Bringing It All Together
To bring this all together, a Wisconsin seller should obtain a seller’s permit before making sales if they:
sell nonexempt retail products – such as jewelry, makeup, or clothing – through Facebook Live, and
expect to make $2,000 or more in taxable sales in a year.
Further, the seller should assess sales taxes on the retail products they sell, based on the tax rate where the taxable item will be shipped. If a product is shipped to a Wisconsin county that assesses a county sales and use tax, the seller must assess the full 5.5%.
Sellers must later remit all sales and use taxes collected to the Wisconsin Department of Revenue. Wisconsin sellers selling to buyers outside of Wisconsin must determine the sales and use tax reporting requirements of those states or counties, as applicable.
A remote seller in a state other than Wisconsin must register as a Wisconsin remote seller, and assess and remit to the State of Wisconsin all sales taxes collected, if the seller:
sells nonexempt retail products through Facebook Live; and
sells at least $100,000 in taxable sales; or
completes over 200 sales transactions in a year to Wisconsin addresses.
Sales taxes should be assessed based on the tax rate where the taxable item will be shipped.
Like any in-state businesses, remote sellers may be audited and subject to unpaid sales tax plus interest and penalties for failing to properly register, collect, and remit sales taxes.
It is important for buyers to note that they are not immune from liability if a seller fails to assess and collect sales taxes. As previously mentioned, a buyer must pay use taxes in the event sales taxes have not been charged and no exemption applies.
The Wisconsin Department of Revenue provides a convenient tracking method for individuals and businesses to track use taxes owed, which may be paid quarterly or annually to the state. Like sellers, whether in-state or remote, buyers who fail to report and pay use taxes may be audited and subject to unpaid use tax plus interest and penalties.
Finally, to avoid future federal and state income tax liabilities, sellers who make more than the applicable threshold, based on year and filing status for income reporting purposes, must report all income derived from Facebook Live sales.
Conclusion: Be Aware of Liabilities
While platforms like Facebook Live make it easy and convenient to sell and buy, especially during times like COVID-19, it’s important for both sellers and buyers to be aware of general retail sales requirements that may lead to significant legal and tax liabilities and consequences.
This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.
1 A seller’s permit is also required for other non-exempt activities, including the leasing or rental of tangible personal property or sales, but the scope of this article is limited to the sale of retail products.