Well, this is a bad PR story, although apparently a self-inflicted one, for tax administrators.
But, I think there are lessons to be learned that would make tax administration simpler, less mysterious to taxpayers, and reflect the realities of today's business environment (whether that business is small and temporary or likely to be large and longstanding).
- Assume that people do want to properly comply with the tax law because the majority do. The reality is that people will try to make a little money by selling something on a short term basis. Yes, there are sales and income taxes to deal with. Why not just create a simple online and paper form where a family or school group can register for sales tax for a single event (and do so for all of their single events). The website tells them they need to either collect sales tax from customers or pay it themselves and the rate. Then after the event, they go back online and report and remit the payment or can print the form and mail a check. The seller doesn't need to register, get a resale certificate or file quarterly reports. If they do want to do all of that, they need to indicate that they are a business and follow the normal seller registration and filing procedures. Basically, tax administrators should recognize that there are individuals, families, school and non-profit groups that occasionally hold a sale, want to be compliant, but don't want to be stopped by paperwork and filing that is beyond what is necessary to collect the tax. (I realize that the answer could instead just be - exempt these small activities. But then it gets to an issue of what is small and it misses an opportunity for budding entrepreneurs to learn about the complete financial picture that also includes the reality of tax obligations.)
- Take opportunities to get some good PR. Why didn't the Idaho Tax Commission just explain about collecting sales tax and help the family do what they needed to do? Of course, they may have and it was so burdensome that the family realized that the answer was to shut down the stand. This is why the suggestion in the prior bullet point should be pursued by tax administrators.
- Be sure the income tax is simple for small activities. For income tax purposes, the family should be allowed to just report the sales as miscellaneous income. If they want to deduct expenses, they should be able to get the cost of sales but not other expenses unless they want to show they are in a trade or business (they would otherwise be miscellaneous itemized deductions subject to the 2% of AGI floor). BUT, even the income tax can and should be simplified by a law that just exempts up to $400 (or some other amount) from income tax (so no reporting of the income or expenses) for isolated sales activity (such as the annual garage sale or seasonal pumpkin sale by children). The tax law includes a far more generous exclusion- the Section 280A exclusion for rental of a residence for 14 days or less.
I hope the Idaho Tax Commission will re-evaluate its system in light of the bad press it got and set an example for how the tax system can be friendly and help people to easily comply with realistic rules and systems.
What do you think?