Sales Tax on eBay: What Sellers Get Wrong

“eBay handles sales tax now, so I don’t have to worry about it.”

That’s the most common — and most dangerous — misconception among eBay sellers. eBay does collect and remit sales tax in most states as a marketplace facilitator. But that doesn’t eliminate all of your tax obligations. Not even close.

What eBay Actually Handles

Since 2019, eBay (and most other online marketplaces) has collected state sales tax automatically from buyers in states with marketplace facilitator laws. This means:

• eBay adds sales tax to the buyer’s total at checkout
• eBay collects the tax from the buyer
• eBay remits the tax to the state government

The seller doesn’t see this money. It doesn’t appear in your payout. From a cash flow perspective, marketplace sales tax is invisible to you.

This is genuinely one less thing to worry about. Before marketplace facilitator laws, sellers had to calculate, collect, and remit sales tax themselves in states where they had nexus. That was a nightmare for small sellers.

What eBay Doesn’t Handle

Here’s where sellers get confused:

Income Tax

Sales tax and income tax are completely different things. eBay handles sales tax. You handle income tax.

Your profit from eBay sales is taxable income. If you’re reselling for profit, the IRS considers it business income, regardless of whether you think of it as a “hobby” or a “side hustle.”

The thresholds:

• eBay issues a 1099-K for gross sales of $600 or more
• This reports your gross sales, not your profit
• You’re responsible for calculating and reporting your actual profit (gross sales minus deductible expenses)

State Income Tax

Same story at the state level. Most states with income tax want their share of your eBay profits. The rules vary by state.

Quarterly Estimated Taxes

If you’re making significant income from reselling and don’t have an employer withholding taxes for you, you may need to make quarterly estimated tax payments. Underpaying throughout the year can result in penalties at tax time.

The Income Tax Misconceptions

“I paid more than I sold it for, so it’s not taxable.” If you paid $500 for a record collection and sold individual records for $400 total, you have a $100 loss. That’s correct — and that loss can offset other income. But you need to document and prove the purchase price.

“It’s a hobby, not a business.” The IRS uses several factors to determine if your activity is a business: Do you make a profit? Do you depend on the income? Do you put in regular time? Do you try to improve profitability? If you’re sourcing regularly and selling for profit, it’s a business in the IRS’s eyes.

“I made under $600, so I don’t owe anything.” The $600 threshold is for 1099-K reporting, not for tax-free income. If you made $500 in profit, you technically owe income tax on it, even without a 1099-K.

“I don’t need to track expenses.” Without records of your costs (purchase prices, shipping, supplies, mileage to the thrift store), you can’t prove your deductions. Gross sales minus undocumented expenses equals “trust me, IRS” — and that’s not a winning strategy.

What You Should Track for Tax Purposes

Every reselling business should track:

Cost of Goods Sold (COGS): What you paid for each item. Keep receipts. If you buy from thrift stores that don’t give receipts, take a photo of the price tag. If you buy collections, allocate the total cost across individual items.

Shipping costs: What you actually paid for shipping — labels, packing materials, tape, boxes. Both what eBay charges and what you spend out of pocket.

Platform fees: eBay FVFs, per-order fees, promoted listing fees, store subscription costs. These are all deductible business expenses.

Mileage: Driving to source, to the post office, to buy supplies. Track the miles. The IRS mileage rate for 2024 is $0.67 per mile. That thrift store run is deductible.

Supplies: Mailers, poly bags, tissue paper, a printer for labels, ink cartridges, a scale, a light box for photos. All deductible.

Home office: If you have a dedicated space for your reselling operation, a portion of your rent/mortgage, utilities, and internet may be deductible. Consult a tax professional for the rules.

The Documentation Problem

Most sellers don’t track this stuff. Not because they’re trying to evade taxes, but because it’s tedious. You go to Goodwill, buy 15 items for $47, and stuff the receipt in your pocket. That receipt is now COGS documentation for 15 separate inventory items.

Proper documentation means:

1. Keep the receipt
2. Record each item’s allocated cost (is it $47/15 = $3.13 each? Or did some items cost more than others?)
3. Match each item to eventual sale proceeds
4. Calculate profit per item at time of sale

This is bookkeeping. And at scale — 500+ items per year — it’s a significant administrative burden without tools to help.

Self-Employment Tax

Here’s the one that really surprises people. If your net self-employment income exceeds $400, you owe self-employment tax — that’s Social Security and Medicare contributions.

The self-employment tax rate is 15.3% on top of your income tax. If you made $10,000 in net eBay profit, you owe approximately $1,530 in self-employment tax alone, before income tax.

This is the tax that turns a “nice side hustle” into “I owe more than I expected.” Many casual sellers don’t realize this exists until their first tax filing.

Practical Steps

1. Open a separate bank account. Keep business and personal finances separate. It makes tracking infinitely easier.

2. Track every purchase. Use an app, a spreadsheet, or inventory management software. Every sourcing trip, every item, every dollar.

3. Save 25-30% of your profit for taxes. Before you reinvest that eBay revenue into more inventory, set aside a quarter to a third for taxes. Better to have too much saved than to owe at tax time.

4. Consider quarterly estimated payments. If you expect to owe more than $1,000 in taxes for the year, quarterly payments avoid penalties.

5. Consult a tax professional. This article is educational, not tax advice. A CPA who understands reselling businesses can identify deductions you’re missing and structures that save you money.

6. Use tools that track the numbers for you. Instica integrates per-item cost tracking, fee computation, and profit calculation — giving you the documentation you need for tax time without maintaining a separate spreadsheet. When April comes around, your per-item P&L is already calculated.

The bottom line: eBay handling sales tax was a huge win for sellers. But it’s one piece of a larger tax picture. The sellers who thrive long-term are the ones who treat their numbers seriously from day one.