The legislative amendments envisage storage of information about shipments with cash on delivery for a 5-year period with the aim to tax particular transactions.
Probably everyone has an acquaintance that sells diverse goods online and thus generates an income which often exceeds the average salary in the state. How many of your acquaintances duly follow the obligations for e-commerce? Probably a low percentage. This activity does not differ from selling televisions in a shop or automobiles in showrooms. Many obligations appear for the seller: declaring the income, payment of profit tax, charging VAT in the cases specified by the law, accounting, registering a cash register, etc.
Shopping online has many advantages and conveniences. It is no accident that its share of the market is growing with double digits every year. The more e-commerce is becoming a part of our lives and the turnover, the more it is of interest to the tax authorities. The latter are adapting fast to the new market conditions, in which the purchaser and seller are carrying out a taxable transaction without them having to meet in real life, and are constantly expanding their verification and monitoring methods.
The main way of carrying out e-commerce is by sending post and courier shipments with cash on delivery. While for the purchaser it is not of upmost importance whether they will pay the price in the shop or to the courier, for the seller things are a bit different. With the shipment of the goods and the receiving of the sum from the delivery one is materializing at least two legal hypotheses which greatly concern the tax authorities: 1/ realization of taxable income and 2/ realization of a shipment which is chargeable with VAT in the cases specified by the law.
In order to better trace such practices, in the peak of the summer season, the Ministry of Transport, Information Technology and Communications published a project for an Amendment and Supplement Law for the Postal Services Act on their site for public discussion.
What are the legislative changes which are being prepared?
The introduction of the new obligations for the post operators leaves a particular impression – they must collect and store for a period of five years identification data of senders – physical persons (as well as information about authorized persons) of domestic and outbound international post shipments. It is these shipments that are with cash on delivery and their price is paid from the operator to the sender via postal money orders.
In other words, the government is making active legislative steps with which the tax authorities will be able to require information from post operators about all shipments with cash on delivery for 5 years backwards. The aim is clear – to ascertain commercial activity from a person and to impose it with tax.
The suggested amendments do not create new rules for online merchants but are rather a hint that the compliance with the current rules will be monitored more strictly. Let us consider the hypothesis where the sale of goods online by sending them with cash on delivery is a taxable transaction.
Who has to be careful?
In the general hypothesis income from the sale of effects is not chargeable. However, regarding a sale made by the seller in his capacity as a merchant (that is to say that commercial activity was carried out by selling), then tax is payable.
According to the Commerce Act a merchant is every individual or legal entity which by occupation purchases goods and other effects with the intent to sell them in their original or processed form, as well as every person who establishes an enterprise which requires, due to its subject and volume, that its activities are carried out in a commercial manner. Simply put, the quality of being a merchant is obtained by deals in which we take part in, not with the inscription in the Commerce Register.
The law does not determine clear criteria to differentiate commercial sales (as a result of economic activity – that is to say with the intent to earn profit) and sales that do not have such nature. On the basis of systematic analysis of different regulations, as well as the tax authorities’ practice, it can be concluded that periodic sales of goods, purchased with the intent to sell them and earn profits, is a commercial activity. The income from it is chargeable.
The difference can be illustrated with the following examples:
Everyone from your family is an avid cyclist and five years ago you bought four bicycles with the intent to use them actively during the weekends and breaks. With time, amortization takes its toll and you decide to sell the bicycles and buy new ones. You take a few nice pictures and post them on a site for free ads. It is not long before you find a buyer who has interest. The courier company right around the corner is more than happy to deliver the bicycles with cash on delivery. Is the earned income chargeable? Absolutely not. Even if you sell the four bicycles at a higher price than the price you bought them, you have not carried out economic activity because: 1) you are making this transaction as an exception and 2) before five years you did not buy these five bicycles with the intent to sell them at a higher price, but for personal use.
The situation however is different in the following case – your job is connected with frequent travels to Montana. Almost every time you visit, you buy from the local bicycle factory two bicycles with the clear idea that their price there is much cheaper than their price at the mall. Later on, you announce the bicycles for sale online and, just like the previous situation, you find a buyer whom you send the bicycles with a cash on delivery. This is not an incidental case, but rather your practice since if we track your ads online (and from recently your shipments with cash on delivery) we will see that in relatively short periods of time you have sent bicycles to different receivers in the state and abroad and that you received money from this. In this case, even if you do not expect it, you are a merchant within the meaning of the law. You are carrying out economic activity and the income from it is chargeable.
What you should know if you are in situation B?
Carrying out commercial activity in the above-mentioned sense creates an obligation for the sellers to declare their income and respectively to pay taxes for them. Up until now it was not easy to sanction the failure to fulfill this obligation – it can be very difficult to connect an anonymous profile on a site for free ads or a page on social media with a specific person with three names and an identification number. Even if that did happen, establishing all the sales and the profit they brought was practically impossible.
This is exactly one of the main reasons for the suggested amendments in the Postal Services Act: “the necessity to implement effective control on online merchants as well as on the entire activity along the chain until the moment of delivery occurs”.
What will follow from the suggested amendments to the law?
Because of increased popularity (or because of a signal), a tax inspector decides to audit a particular site or page on social media for selling clothes. The inspector orders goods and announces cash on delivery. After a few days his purchase reaches them and, of course, the waybill has their name on it as well as the name of the sender – Bingo! The inspector has the name which is of interest to them and officially requires information from the Bulgarian Posts and all other courier companies in the state about the shipments sent from this person with cash on delivery. It is evident from them that in the last year the person in question has received from cash on delivery a sum of BGN 90 000. What follows is an official letter to the seller in which it is required that they provide information about their sent goods and the income from them. After deducting the normatively established expenses from the turnover, we are left with a specific sum (let us say BGN 55 000) which is treated as profit. This profit must be charged with 15% tax plus interest of delayed payment. The described scenario is completely possible in the hypothesis that a firm is audited (not a physical person). The difference is that the stake is 10%.
The tip of the iceberg – VAT
The income tax is not the only thing that could cause the merchant headaches. According to the VAT Act, every taxable person who has a chargeable income of BGN 50 000 or more in the last 12 months has the obligation to apply for VAT registration.
From the moment a person is registered under the VAT Act, one is obliged to charge 20 % on every delivery (in our case – on every sale). This tax is added to the sale price and is paid by the purchaser but the seller has the obligation to deposit the tax in the state treasury.
In the above described case with the site for selling clothes the difficulties are yet to come – in the course of the audit the inspector will establish that the merchant has reached the limit of BGN 50 000 even on the seventh month of the audited period. Thus an official backdated registration will be done. As follows, in addition with the income tax, 20 % VAT will be charged on every sale made from the eight month forward. The circumstance that these sums were not gathered by the purchasers does not free the merchant from the obligation of depositing the tax in the budget.
Here is how one seemingly harmless activity for generating additional (even often main) income which seems far away from the sight of the state can bring about serious financial obligations on the merchant who up until now has relied on the anonymity online and the difficult traceability of shipments with pay on delivery.
The proposed texts have not yet entered the Parliament for discussion and vote but there is no doubt that the state will make more effort to uncover online trade and the taxation of income from it.
If you are selling online, you should know that from the position of the tax legislation, this trade is no different from selling these same goods in a store in a trade center. Sales online save you the cost of renting a store, employing staff, consumables and so on, but it will not spare you from the income taxes. Everyone who sells goods online without following the rules will be sanctioned when audited.
This article is published in dir.bg under the title: “Online trade in the sight of the National Revenue Agency”.
Author: Simeon Hinkov, Attorney-at-law