Academic journal article Journal of Accountancy

Online Selling and New Third-Party Network Reporting

Academic journal article Journal of Accountancy

Online Selling and New Third-Party Network Reporting

Article excerpt


The payment settlement reporting requirements of new IRC [section] 6050W, which go into effect next year, apply broadly to transactions conducted by debit or credit card, as well as third-party network transactions. While CPAs' clients can easily understand how accepting payment cards at point of sale might affect them, those with income from online transactions settled either by payment card or through PayPal or other such third-party networks may have questions about the reporting requirement--or about reporting income generally from online transactions.

The reporting requirement was introduced by the Housing Assistance Tax Act of 2008 (PL 110-289). Banks or other "merchant acquiring entities" will report aggregate amounts of payment card transactions to payees and the IRS, and third-party networks likewise will report aggregate payments.

The Internet has certainly become a major venue for retail commerce. In 2009, alone handled more than $57 billion in gross merchandise value. Those transactions generated more than $31 billion in net total payments through PayPal, which is a subsidiary of eBay Inc. (annual report, eBay Inc., Feb. 17, 2010).

Section 6050W(e) provides a relatively high de minimis threshold for transactions settled by third-party networks: Reporting is required when the total gross reportable amount to a payee exceeds $20,000 and the aggregate number of transactions exceeds 200 (both conditions must be met). This provision would seem likely to exempt casual sellers and even some smaller businesses from reporting, but businesses should be aware that many entities that are not banks and may not consider themselves to be payment settlement entities fall under the expansive definition of "third-party network." Final regulations (TD 9496) issued in August did not adopt a recommendation made by several comment submitters in response to Notice 2009-19 that payment card transactions also be subject to a de minimis exception.


Beyond any reporting requirements, CPAs' individual tax clients who sell personal items on eBay might not be sure whether their income from such sales is taxable. CPAs can point them to the Tax Court case of Andrea Orellana (TC Summary 2010-51). Orellana--an IRS revenue officer--said she hadn't known she was supposed to report income from what she regarded as an ongoing "online garage sale" through eBay But the Tax Court sustained an IRS determination that because of these activities she underreported her income by $30,663 for 2004 and $11,179 for 2005. …

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