Visitors to eBay Inc.'s online auction site yesterday could have bid on such items as a "WOW! Exquisite 1985 Lamborghini Jalpa" (one bid at $27,000), an "Italian Venetian HUGE Painted Armoire" (seven bids, reaching $2,999.99), or a "Bob Denver Shirt From GILLIGAN'S ISLAND" (two bids, $1,051).
Whether or not all these items sell, it's obvious that a lot of money is changing hands through Internet auctions.
What isn't so clear is whether the taxes that may be due on these transactions are being collected.
While wide attention is being focused on the taxation of people who buy things from retailers over the Internet, little notice is being given to the taxation of those who sell items through Internet auctions.
Unlike stock brokerages and banks and some other financial firms, eBay, Amazon.com Inc. and other firms that operate online auctions do not report to the Internal Revenue Service the amounts realized by their customers.
Officials of several of the companies say they are not required to report, and add that they are confident that customers who have tax liabilities from auction sales report what they owe and pay it.
"The tax responsibility and reporting responsibility rest with the individual buyers and sellers," an eBay spokesman said.
People who sell items over the Internet and realize a gain are liable for income tax on that gain, several accountants said. In most cases, a gain would result if the item were sold for more than the seller paid for it.
But are online sellers complying with this obligation? Historically, tax compliance is much higher when there is so-called third-party reporting than when the government relies on taxpayers themselves to report their profits.
Stock brokerages, for example, are subject to a "gross proceeds" reporting requirement. This means that when a customer sells, for example, 100 shares of the XYZ Corp. at $25 a share, both the customer and the IRS will receive a report of a $2,500 transaction. That doesn't mean the seller necessarily owes tax -- that depends on what the seller paid for the shares -- but both the seller and the IRS are on notice that the potential for tax exists.
Auctions have been around longer than the income tax, but historically they have not generated huge dollar volumes. The computerization of auctions, however, with the corresponding opening of the market to virtually anyone, has led to explosive growth in auction-type transactions.
EBay, which pioneered the online auction, has gone from zero to three-quarters of a billion dollars in merchandise sales in little more than three years. Amazon.com, which began as an online retailer of books and expanded into other merchandise, has also jumped into the auction business.
There are dozens of other auction sites on the Web, specializing in such goods as antiques, automobiles or memorabilia.
IRS regulations governing financial services require many types of brokers and dealers in various kinds of property to file "gross proceeds" reports with the agency. The regulations cover barter transactions as well as sales, and apply to anyone "who for a consideration regularly acts a middleman."
The middleman must be someone who "would in the ordinary course of business know the gross proceeds of the sale."
However, IRS regulations on information reporting do not specifically address auction houses, and the industry takes the position that they don't apply.
A spokeswoman for Amazon said, "We do not report the transactions. We are not required to," and likened the situation to that of newspaper classified ads. Newspapers do not report the transactions that result from their ads.
Since Amazon, like eBay, is compensated by taking a percentage of the transaction -- and thus unlike a newspaper would know the gross proceeds -- she conceded that the situation is not exactly analogous, but added that it is close enough.
Brad Handler, director of law and public policy for eBay, said his firm's service is "merely a forum for buyers and sellers" to get together, and thus differs in a fundamental way from a stockbroker or others who "are a lot more involved in the transaction."
Several accountants noted that determining the tax liability on millions of small sales would be quite difficult, and perhaps not worth the effort if it meant pursuing individuals who sell just a few items, even if they made a tidy profit.
"It's very hard to enforce when you're dealing with personal property," said one. But he said he thinks "the IRS would get concerned if someone started doing this on a commercial basis."