Taxation of income derived from sale of goods on the Internet
On taxation of the income derived from sale of private persons’ goods on the Internet it is important to know the purpose or reason for this activity.
A sale of goods is considered a business activity if sales efforts are practised for the purpose of gaining profit. In the case of a business activity sales efforts have the features of commercial activities (for example, making a profit, economic self-support, planning and continuity of the activity). If risks and obligations arising from commercial activities fall on the seller, it will also refer to a business activity, as bearing risks involved in economic activities is one feature of a business activity. Advertising goods for a larger group of persons and receiving commission from other persons’ purchases is also a business activity.
If a person is engaged in sale of goods in the framework of a business activity, he/she must be entered in the commercial register. A sole proprietor who has been entered in the commercial register may deduct from the business income his/her expenses related to commercial activities, and the gains received shall be subject to an income tax and a social tax and if the person has joined the mandatory funded pension system, it is also subject to the contribution to the mandatory funded pension. Business income shall be declared on Form E of the income tax return. The business income received shall be declared on Form E even if the trader is not entered in the commercial register. The person who has derived business income but is not registered can deduct from the business income the acquisition cost of goods certified and transaction costs related to purchase and sale, other expenses by the non-registered person cannot be taken into account.
In a situation where selling of articles is an occasional activity for a private person and there exist no features of business activity, the proceeds received from the sales of goods shall be considered on taxation as the income derived from the transfer of property. Such income shall be declared in subdivision 6.3 on Form A of the income tax return as transfer of other property. The gains received shall be subject to income tax, i.e. the difference between the purchase price and the selling price which has been reduced by the transaction costs related to the purchase and sale. If a private person gets a commission for other persons’ purchases, then such income shall be declared in subdivision 7.1 on Form A of the income tax return as other income, if such activity is occasional and no continuous earnings are in question. The income derived from the transfer of property and other income is subject to income tax only.
If the goods have been purchased for own use and sold further after the use then this shall be considered as sale of the goods in personal use. Generally, in this case no new goods, unused or in original packaging are in question but second-hand goods which quantities are not large. For example, you may consider as the goods in personal use also the clothing items purchased for your own child but which he later has outgrown. Income derived from the sale of goods in personal use is not subject to income tax and you shall not declare such income. However, you cannot, for example, apply tax exemption, if the goods purchased for yourself do not suit you and these will be sold further as new items adding the trade-margin. In this case it would have to be considered whether business income or income derived from the transfer of property is in question.
A private person acquires goods from a third country (China), adds the trade-margin of 20% to the purchase price and sells the goods in Estonia through a group/page created in Facebook. The activities of a person will refer to a business activity, for example, if:
- A private person continuously acquires goods and sells these adding the trade-margin.
- A private person continuously acquires goods, uses these couple of days and sells the second-hand goods adding the trade-margin.
A private person gathers up orders of goods and money. The postal charge of the goods sent to Estonia shall be divided equally between all customers.
If a private person places the orders instead of all customers, without taking commission, it is not subject to taxation. However, if a private person collects commission from the customers for mediating their orders, then depending from the purpose of the activity and the continuity, the commission shall be declared whether under subdivision 7.1 on Form A of the income tax return as other income, from which no income tax has been withheld, or on Form E as business income.