Massachusetts and Vermont Sellers Surprised by 1099-K Forms [UPDATE]

Micro and Small Business sellers in Massachusetts and Vermont are getting a nasty surprise from PayPal, Payable, and possibly other TPSOs (Third Party Settlement Organizations).

While there is a slight gray area on what defines a TPSO, Etsy and Amazon low-volume sellers in those states may also receive 1099-Ks as Etsy considers itself a TPSO and Amazon reports payments as per IRS reporting standards.

As both marketplaces follow IRS rules, there is a good chance they will conform to the state rule as well. We are trying to get confirmation from both marketplaces on this possibility and will update the story if we receive a response.

Update 2/7/2018. There is a thread on Etsy’s forum about possible double reporting. We are monitoring that discussion for any news that could help with this situation. But sellers do seem to confirm they have received 1099-Ks for those lower thresholds if they are located in MA and VT.

Update 2/8/2018. We received a response from an Etsy spokesperson:

“Massachusetts passed a law late last year requiring Etsy to send a Form 1099-K to the State for all sellers with a Massachusetts address who have made more than $600 in sales processed through Etsy Payments over the course of the year.

Etsy provided sellers in Massachusetts who met this threshold with information about the changes in December 2017. In this email, sellers were advised that they would receive a Form 1099-K from Etsy for the 2017 tax year in early 2018. We are aware of a similar law passed in Vermont and will be sending information to relevant sellers in Vermont in the coming weeks.

Sellers looking for more information about 1099-K forms can visit Etsy’s Help page or contact Etsy support.”

Why The 1099-Ks for Low Volume Sellers?

These two states enacted new rules (Link for Massachusetts Rule Change and Link for Vermont Rule Change) that require TPSOs to report gross sales of $600 or more to the state and send the payment recipients a 1099-K.

This pre-rule change document from Peter Griffin, Legislative Counsel, Vermont explains the reasoning behind the change. He even included information from Massachusetts and how much that state expects to gain from the 1099-K reporting requirement change.

“Massachusetts Department of Revenue estimates $20 million in additional revenue from increased income tax compliance due to this reporting… Scale MA estimate to Vermont: $1.5 to $1.8 million preliminary estimate.”

Federal Rules Different from State Rules

Just to be clear, the IRS Federal rules have not changed. The reporting requirements enacted by the IRS in 2012 are still valid:

• All payments made in settlement of payment card transactions (e.g., credit card);
• Payments in settlement of third party network transactions IF:
  • Gross payments to a participating payee exceed $20,000; AND
  • There are more than 200 transactions with the participating payee.

New State Laws Just the Beginning?

While we are not aware of any other states that have changed reporting thresholds that are different from the IRS standard, we can’t imagine other states not considering similar legislation for 2018.

What is really disturbing here is the low threshold of $600. TPSOs are being forced to divulge information on payments of just $600.

Are these states this fiscally broke they need to squeeze a few pennies out of micro-businesses and individual sellers? How much will this enforcement cost the states, nevermind the cost to the micro-businesses and TPSOs?

And how many of these 1099-Ks are being sent to individuals just selling some personal property on eBay and other Marketplaces?

How do TPSOs know the difference as presumably, personal property should be exempt? Otherwise, it would be double taxation as personal property is typically purchased with after-tax monies.

“… but in this world nothing can be said to be certain, except death and taxes.”

Benjamin Franklin

The $20,000 or 200 transaction reporting requirement by the IRS seems like a fair dividing line between professional sellers and individuals either making a couple of dollars on the side or selling personal property.

And while the TPSOs say they are not reporting payments below $20,000 to the IRS, the fact they are sending this information to these two states means taxpayers are going to have to deal with the reported revenues on their IRS tax returns.

Personal or business state tax filings are always based on IRS tax returns, so it would seem foolish to ignore the 1099-Ks. That could only lead to audits!

Remember, Tax is Due on Profits Only, Not Payments!

One final reminder if you are in Massachusetts or Vermont. Discuss the 1099-Ks with your tax preparation professional. We are not authorities on taxes or the law and you should seek professional advice on this.

Because you only pay taxes on profits from the payments reported on the 1099-Ks, provide your tax professional with all expenses related to these sales. This will help reduce your potential tax burden.

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