The advent of online shopping has revolutionized consumer behavior, offering convenience, a wide range of products, and competitive prices. However, one notable concern has been the inconsistency in the collection of sales taxes, with online sellers often enjoying a perceived advantage over brick-and-mortar stores.
In response to these concerns, a new tax rule, enacted as a part of the American Rescue Plan of 2021, was passed that would require, beginning in 2023, third-party payment processors, such as Venmo, eBay, and Amazon, to issue 1099-K forms to small business owners and entrepreneurs who have at least $600 in sales on their platform. The rule was to take effect in 2022; however, the IRS delayed implementation to address concerns on the timeline of executing the lowered threshold requirement. Prior to this act, third-party payment processes were only required to submit a 1099-K form if the seller engaged in more than 200 transactions per year, exceeding an aggregate amount of $20,000.
The Red Tape Reduction Act
On May 18th, Senator Sherrod Brown introduced legislation, the Red Tape Reduction Act, designed to increase the threshold that triggers an obligation on third-party payment processors to issue IRS Form 1099-K from $600 to $10,000. This bipartisan effort is being undertaken as a direct response to the new tax rule enacted under the American Rescue Plan and seeks to reduce burden and oversight by “preventing the Internal Revenue Service from interfering with minor transactions and cut[ting] down on excessive paperwork.”
In separate statements, Senator Brown said:
“Ohio small businesses are frustrated with the 1099-K reporting threshold. This red tape hits small businesses and other Ohioans selling products online, sucking time and resources from the smallest online sellers.”
Senator Cassidy stated:
“The low cap would hurt everyone, from small business owners to people who use apps to pay their rent.”
Universal Support for Raising the Reporting Threshold
In addition to Senators Brown and Cassidy, the $600 threshold was opposed by the Republican led House Committee on Ways & Means. Its Chairman, Jason Smith, said:
“This goes after hairdressers and your neighbor’s kid, not billionaires, and will create a digital trail for IRS agents to monitor more Americans regardless of whether these individuals actually owe any taxes on the payments they received.”
In close, there is universal support to raise the reporting threshold on third-party payment processors well above $600, which should reduce the burden on small businesses who sell goods online. KJK will continue to monitor this developing area of legislation and offer our clients guidance and advice suited for their particular needs.
For further questions or clarification, please contact KJK eCommerce attorney Derek Hartman (DPH@kjk.com; 216.736.7248).