Adam Gifford: Online traders fear long arm of the tax man

When the internet emerged as a place to do business, the United States President at the time, Bill Clinton, imposed a moratorium on taxes on the fledgling medium.

The idea was to prevent any of the 30,000 US state and local tax jurisdictions from coming up with anything which would stifle the growth of the internet, while also giving policymakers time to study and understand the tax issues raised by internet commerce.

Entrepreneurs were free to lose their shirts experimenting with new business models - remember the new economy, where you didn't need to make a profit - without a state-imposed compliance cost.

There was an investment boom, as more money was spent developing e-commerce technology than the industry will ever get back in licence fees and sales.

Now we understand the internet is just another channel to the customer, albeit more direct, and the policymakers are itching to get back in there.

Members of New Zealand internet auction site TradeMe have been in a state of alarm over the Secondhand Dealers and Pawnbrokers Act 2004, which comes into effect in April.

Many fear they will be classed as dealers and have to pay for a licence.

There is already a suspicion that Inland Revenue is using auction sites to identify undeclared income.

That is something the department is quick to deny. Field delivery group manager Martin Scott says that while IRD has audited some online traders as part of its normal audit activity, it has not targeted online trading, nor has it identified it as a national tax risk.

However, if the department was to find a high level of non-compliance in this area it could potentially spark a wider examination, as it would in any other area of trade, Scott says.

Which begs the question, how will it find a high level of non-compliance if it supposedly isn't looking?

The rule of thumb is there will usually be no tax consequences if you sell things online or offline that you no longer need.

But if you are a regular online seller, IRD might look closer. If you buy goods to on-sell, want to make a profit, or your normal business involves dealing in those goods, it would definitely demand you declare sales and pay tax.

Indeed, if your online business turns over $40,000 a year, you need to be registered for GST.

By the tax inspector's rule of thumb, there will be more secondhand dealers out there than the 1000 or so now registered, though probably not all the 200,000 people who use TradeMe each month. The Justice Ministry expects several thousand will need to register.

There are also all the New Zealanders who sell stuff on eBay. It is not easy to get information from the US-based company, but it can be done, as the Australian Taxation Office did when it sought lists of PowerSellers - users with over $2000 of sales a month - for a crackdown on the cash economy.

The new secondhand dealers act exempts internet trading sites from having to hold licences, but it requires them to keep records of traders and trades and make them available for inspection.

Users, though, can find themselves caught by the act if they sell items online more than six times a year, or make more than $2000 a year from dealing online.

The way the ministry puts it, the important test is whether the goods were acquired for the purposes of trade - selling off household effects is okay.

If you've been going round the garage sales every other weekend and on-selling what you've bought the following week, then you're not likely to be able to argue that you're not engaged in business, the ministry told the Herald.

Given that the maximum penalty for unlicensed trading is $20,000, the act could be a dampener on online trading.

That would not be a good thing. TradeMe already accounts for 60 per cent of traffic to New Zealand internet sites, and hit 12 million page views last week.

Internet auction sites have proved to be a valuable way for people to learn basic internet skills and become comfortable with e-commerce. That should be encouraged rather than discouraged by a Government that talks about the knowledge economy.

While the ministry positions the act as a practical attempt to address property crime, more practical steps, like getting police to take burglary seriously, might have more credibility.

That said, TradeMe has moved to require all sellers to have a New Zealand bank account. While that has upset some Australians, it should have the welcome effect of hampering the Romanian fraudsters - often overseas-based people who advertise goods, take the money and then don't deliver any goods.

The new act updates a 1963 law, but it doesn't seem to have really grasped changes in society and the secondhand economy in recent years.

Publications like Trade & Exchange and Loot, and the growth of eBay and TradeMe, mean people are cutting out the intermediary when they sell their goods.

The act can be seen as part of the tendency by lawmakers to make as much as possible illegal, even if resources aren't put into enforcement.

Then when they do want to catch someone, they can throw a very large book at them.

While many of the things that happen online are analogous to what happens offline, the internet has allowed new business models and behaviours to develop. Ill-considered legislation can hamper that.

There is also the temptation of governments trying to tap what they see as a huge unregulated pool of cash.

Even the Clinton moratorium seems to have run its course and a US Congress committee wants to extend a 3 per cent telecommunications tax, originally imposed to pay for the Spanish American War, to cover all data communications services to end users, including broadband, dial-up, cellular and other links.