Blogging and Tax Obligations

I'm a little late to this story - but it is interesting and raises some questions about e-commerce and Internet activities and possible tax consequences and whether old rules make sense for 21st century practices.

A few weeks ago, a story in a Philadelphia paper made it sound like the city was imposing a $300 tax on bloggers.* What the city actually does is impose a business license tax. Many cities impose business license taxes. In Philadelphia, the tax is called the Business Privilege Tax. According to the stories,* the city obtained information per information sharing arrangements with the IRS about people in the city who had reported business income (such as on a Schedule C). The city then contacted those who had not paid the BPT. This is not unusual - many cities do this.

The stories about the tax and comments from readers include that this is business unfriendly, a hardship and unnecessary as the businesses already pay federal and state taxes.

That raises the question and observation - what about local governments? How do they get revenue to provide the key services that individuals want on a daily basis - police and fire protection, no potholes in the roads, open libraries, parks and more?

I think these two topics - city business license taxes and personal blog sites (not those operated by a business, such as a hardware store), raise some 21st century tax issues, such as these:

1. The Internet enables people to operate a variety of businesses out of their homes, such as blogging that might generate revenue from ads or selling an e-book you wrote. When these types of activities do not involve anything other than a computer and Internet connection, what additional city services is the person obtaining that warrants a business license tax? Of course, this can soon get to a fine line because local governments do help or actually provide the electricity, but it is likely minimal. Given new types of businesses and how to operate them, I think cities should be sure their business license tax is only applicable when the business has a location that is not a personal residence and no customers visit that residence. Some cities likely need to also rethink 19th and 20th century rules, such as requiring home businesses to get a "home occupation permit" (see City of Fremont). Why do they need to know if a tax compliant home-based business without any visiting customers has a permit?
2. Should an individual who runs a personal blog but also has ads running on it that generate revenue, owe self-employment tax? Is generation of the ads enough to say you are really self-employed when you are running a blog, say, on preparing meals in a Julia Child cookbook? Of course, there is no argument that the income is subject to income tax (income from any source derived is subject to income tax), but is the fact that a visitor to you site clicked on the Amazon link and placed a large order mean your efforts writing the blog produced business income? Real estate rental income is usually not subject to SE tax, should this passive blogging income fall into the same application? Of course, some bloggers might be treating their blog as a business in which case they should pay SE tax and file a Schedule C and get to deduct business expenses. I think the IRS should provide some guidance on when the personal blogger is subject to SE tax and should be filing a Schedule C (rather than just reporting the affiliate revenue as miscellaneous income). [For more on SE tax policy considerations, see my June 2010 AICPA Tax Insider article on the topic.]

What do you think about city business license taxes and taxes applicable to personal blogging?

* Link to the 8/18/10 story in the Philadelphia Citypaper "Pay Up" by Valerie Rubinsky + link to The Philadelphia Inquirer article by Robert Moran, "Is Philly Taxing Bloggers?" 8/24/10, with clarifications on the story.