Ask HN: Our users don't want to pay taxes
However, we have one massive problem: our merchants are not used to paying taxes and are deeply afraid of using our more monetized features because we are legally required to fill out a 1099-K on their behalf. It's one part "I don't want the government taking my money" to two parts "I don't know how taxes work" in most cases that we've looked into.
Now, some of our sellers don't mind, but the vast (and growing) majority are not comfortable with taxes. This presents a problem as we're still growing, but not sustainably. We obviously want to keep pursuing this startup idea but unless something changes, it doesn't seem likely to work out.
To solve this, we've tried hiring tax experts to explain how taxes work or why it's not as scary as they might think, but it hasn't been very convincing. On the more drastic side we've been thinking about switching business models a bit, but it seems so crazy to me when there is a huge opportunity right in front of us that we can't seem to capitalize on.
Anyone have any experience with this sort of thing? What works? What doesn't?
80 comments
[ 2.7 ms ] story [ 130 ms ] threadThe problem you are trying to address is not a new one. What's worse, solutions have only gotten worse and less palatable because of decisions made as a result from the past generation doubling down on failed policies and strategies that don't work. They've paid the price themselves, and that price will also be passed down to next generations in terms of lost opportunities, lower wages, and less availability of work.
Its a cursed problem. The best solution people have come to a consensus about is that its about investments in technologies that augment labor, rather than replacing labor. This solution worked at a time when there was less regulation and labor was not as expensive as it is today. Currently, it just doesn't work because of the costs to businesses as a result of regulation, and incentivizes businesses to use financial engineering to take advantage of tax loopholes and invest in technologies that replace labor instead of augment it.
On top of that is the runaway inflationary pressures that printing money from nothing causes. No one of any influence has gone to these failed policies and re-examined what didn't work and taken steps to fix it. Instead they've doubled and triple downed on their failures with a this time will be different.
Also, people are rightfully worried about taxes because the things we get for those taxes are minimal, over half of their annual productive time spent working is done for free (to pay those taxes), if you count fuel, sales tax, social security, medicare, income tax, and those other costs that are tacked on at the business level and then passed onto the consumer in costs; you are basically slaving away for a promise that by the time its your turn there will be something for you (social security).
Tax law primarily encourages investments in non-productive assets. The solution so far has been complex financial engineering (some of which resulted in frauds) and the bailout which has been to print money, and you can only kick that can so far before the jig is up and there is a currency crisis.
The problem isn't experts. The problem is credibility. There have been multiple crises where people lost most of what they had accumulated where the experts failed them completely, they did everything right and lost it all and their answer which came after losing it all from the professionals was, "We've never seen this happen before".
The policies that have been enacted deform economies and cause boom bust cycles. Debt is cheap, almost ensuring failures if you aren't bought out with a leveraged buyout when the economy sours. The incentives to invest in productive investments have been neglible compared to the returns on unsound investments; and the investment environment has never been so risky.
>The incentives to invest in productive investments have been neglible compared to the returns on unsound investments; and the investment environment has never been so risky.
What do you expect from a system that avoids full employment at all costs? How exactly is there supposed to be competition over employees without full employment? There is no incentive to do anything productive because some people pointlessly work their ass off for the benefit of money they never intend to spend which displaces other people who then end up in a sort of reserve pool of labor that accept bottom barrel pay who get scooped up by unproductive businesses because the labor is so cheap you can use it wastefully.
Both groups generally have issues with taxes, they usually take payments using Venmo, Paypal Friends and Family, or even direct bank transfer just to get around the reporting. They pretty much use and abuse any form of electronic payment that they can get away with without presenting themselves as a business.
As for monetization, we keep track of the "non-monetized" transactions and it's in the low 7 figures. It's not a crazy amount of money, but it's nothing to sneeze at either.
I'm not sure quite what your business does, but I've seen this personally where my family no longer wants to sell their stuff (which is not really a taxable kind of transaction, but they don't understand how they can report it to the IRS as such) on eBay because they don't want to be taxed on any money they get from it.
The issue is that US taxes are so complex and punitive, and that Americans are so afraid of the IRS. Unfortunately your business won't be able to change that.
Meanwhile, I assume you mean "the stuff they want to sell on eBay is at a lower price than their cost basis". If there's some other way to avoid taxes on sales, I'm all ears!
The taxes aren't, but compliance certainly feels like it is. I owned a dormant UK company that I set up when I was living in the UK. The reporting for that as a US citizen is nightmarish (look up form 5471). People who are any sort of edge case who want to be tax compliant pretty much just can't be without spending mega $$$ on accountants. The only thing that is reasonably straightforward is for people with a single employer on w2 income. And even then, other countries put the US to shame for that circumstance, most don't even require filing anything to their tax authority.
> "the stuff they want to sell on eBay is at a lower price than their cost basis"
Yes, this is exactly what I'm describing. Many people I know use eBay as a sort of garage sale online. All their inventory is used items that are worth less than the original price they paid for it. They may make $1k or so across the year at best. They'd rather just not sell online, not make the money, and not worry about tax reporting when platforms start throwing terms like 1099-k around.
Most Americans are scared of being audited. Whether or not that's a rational fear, it drives a lot of consumer behavior.
This is so true. I'm terrified of the IRS in a way I'm simply not terrified of HMRC. I don't think it's rational at all, but going through the rigmarole of "file these papers you don't really understand, if you screw up, your life is going to get turned upside down" every year for their entire adult lives definitely plays into it.
I would be more afraid of our poorly trained cops firing guns near me.
You send them a guess, and if it's wrong, they mail you back, possibly with a fine or other punishment threatened.
For example the 401k and IRA rules basically exist to encourage people putting money into retirement investment accounts. The idea being that having to account for all the capital gains, divendends, etc would otherwise discourage such investments. But of course the current rules for these are a bit of a mess, with nonsense like the backdoor Roth IRA being possible.
another example of a simplification that actually mostly works is the exception to capital gains on the sale of your primary residence. Indeed, unless you get a Form 1099-S or have exceeded the the $250k ($500k married) gain, you don’t need to report the sale in any way on your tax forms.
That absolutely simplifies taxes for most people who are selling their home, but it simultaneously makes the tax system as a whole more complex.
Similarly there are a lot of weird rules and exceptions over on the business side to try to better align things with Generally Accepted Accounting Principals, in order to avoid the need for businesses to have to keep two sets of books, one for taxes, one for everything else. This adds an obscene amount of complexity to the tax code, especially since not only are special exceptions to the normal tax rules granted for GAAP, but there are a bunch of extra rules intended to prevent specific ways of trying to abuse this.
Scrapping all of that could majorly simplify the tax code. But it would actually makes taxes a lot more complicated for many businesses.
None of this is to say that all the complexity is there for this reason. There is a lot of use of the tax code to create weird subsidies for certain industries. There is even cruft like some special rules whose benefit to taxpayers is far outweighed by the extra work needed to use those exceptions. Rules defined by court cases that were never codified due to a weird exclusion in the codification, and much more.
When your clients are small businesses, you will find they have a wide range of business and financial and legal acumen, and some will lack basic professionalism in most areas. That's especially common in the case of small family businesses.
I used to work at a company that targeted both small businesses and enterprise companies with different versions of the same product. Dealing with enterprises was predictable: they know about corporate governance, they have legal and accounting teams, etc. Every small business was a wild card.
If your clients have not been paying taxes so far, they might be afraid of owing back taxes or fines if they start engaging with the tax system and their past behavior is discovered. Also, some of them are probably avoiding taxes on purpose, maybe because they are crooks, or maybe because they simply cannot afford to pay. You probably aren't going to convince them to start paying taxes just to use your product unless it is incredibly compelling for them.
(of course, this is not relevant to the discussion at hand about a business in the US)
Of course it gets further complicated if your company is a standalone legal entity, but in that case you have a lot more funny scenarios, e.g. you can go to jail for acting against the interest of the company you are the sole owner of.
The business itself pays tax on the net, but the individual pulling money out of the business receives income and must pay income tax AND the additional social security tax.
Alternatively, if it's cash only, they receive 100% of the cash and skip all that.
Most small businesses aren’t fed by VC nor expect an exit. Most are just mundane and boring activities where people expect to receive a premium over a regular job. Or that or they close. Tax avoiding, in many cases, seems to be the path to get there.
Perhaps I wouldn't call those a "mistake" or attribute it solely to small businesses. Large corporations do exactly that - and easily getting away with it due to multitude of reasons.
Large corporations don't pay taxes because of taxation tricks. These small business don't pay taxes because they never fill a tax report.
When 'professionalism' degrades experience, a basic lack of professionalism is exactly what people are shopping for.
If they don't understand the idea that they are running a business, pay tax on their net profit not their gross profit, that "deducting" business expenses is not an optional thing like itemized deductions, what self-employment tax is (and that it is just the employer and employee portions of a tax that already exists for everyone else), etc. then its hopeless trying to explain these forms to them.
In fact, it seems that many of them don't even know if their business is profitable or not, since they have no records of expenses and COGS necessary to calculate that. That's the part that always puzzles me.
For what its worth, the idea of users not wanting to pay taxes isn't that new--some websites even advertise that they don't collect sales tax and I will admit to having sought out businesses small enough not to charge it in every state.
In my limited experience with folks who've run these types of small businesses, they seem to always have enough cash flow that in the short term, profit doesn't matter. Putting food on the table tonight matters. So if that's the case, why bother with the expense of accounting?
But I think more context is needed. Sales tax rules vary so widely depending on the location and item being sold. I assume as a platform you legally have to report 1099-K? Here’s how eBay explains their 1099 to sellers: https://www.ebay.com/help/selling/fees-credits-invoices/ebay...
The problem is that doesn't overcome the fear they have for the IRS, unfortunately.
An emerging hobby business makes enough money to warrant hiring some VERY limited services, but not enough money to hire a book keeper, a CPA, and any other services that a "real business" needs.
I converted a side-hustle into a "real business" that paid taxes for several years. It's not super hard to start a business as a beginner but you've got some hurdles to clear, more-so if you are selling durable goods as opposed to "apps". I made one single mistake while conducting out-of-state commerce that cost me thousands of dollars in one fell swoop: that was more than all the cash the business had on-hand. I had registered to do business in the other state and was trying to dot my i's and cross my t's and be above board, but the mistake was till mine though. I could have spent those same thousands of dollars to hire experts over the same course of time preventing all the wasted money, lost time, and headaches but my business would have made so little profit it would have nullified the reason to be in business as a real tax-paying business.
Along the way I began to see various things as "cost of doing business" which was useful. I was glad to have the experience, I reinvested heavily into the business to save myself time and effort. But I never made enough money to hire others to do anything that I could do myself. The "cost of doing business" part only works if you have regular positive cash flow too.
So again, you are trying to serve hobby businesses who are not profitable enough to warrant them hiring experts to dot their i's and cross their t's for them. They are correct to be afraid of lightly stepping into this world and you won't change that.
I’m curious if you can enlighten me how it works with apps. If I’m living and based in California and I launch an app that people/biz can pay for anywhere in the world, how does that work? If someone in Mew York buys a module on my app is that considered out of state commerce?
If you're doing things properly, you shouldn't start selling your product in a state or country till you have checked your product meets all the laws there and registered a business entity able to sell there.
Then, you will need to submit taxes to that country, and in some cases even have an office there.
I worked for a company whose reason for existing was because clients needed it to comply with the law.
If you didn’t hire, or employ, someone like us, you were violating the law.
Sales pitch was pretty simple: hire us, or you’re a felon.
It was insanely hard to get people to use our services.
It reached the point where sales gave up on trying to convince people to start following the law, and instead focusing on poaching clients from competitors (that is, folks who had already decided to follow the law).
Best advice is don’t fight them. If they’re not gonna do it, they’re not gonna do it.
Depending on the specifics you either reject them as a client, or accept them and file the appropriate paperwork.
You either assist your users in avoiding taxes (probably a crime), or just shrug and say “We didn’t invent taxes”
Do your users not pay sales or property taxes on their day to day lives? How is it your business’ job to figure this out for your customers?
Would a referral link to H&R Block solve this?
However, these merchants are reluctant to use this sort of service because if they used it, our platform legally has to report this in a 1099-K to the IRS. Same as any marketplace these days.
As for the referral suggestion, we actually worked with tax professionals in order to do just that. We figured if we personally vetted some tax pros for referrals vs a link to something like H&R Block, it'd help make the difference. It didn't.
(Also, we use Stripe Tax to handle sales tax for the customers who do use the monetized features. They love it!)
I would point out that avoiding paying tax is a crime, that you don’t want to go to jail because of their preferences, and invite the people that want to commit the crime of tax avoidance (with your help) to take their business elsewhere.
That's going to be what everyone does.
but seriously, you start talking about irs forms and surprised when a small business whon cant afford a fancy ass tax lawyer gets scared? most of them would get in trouble if the irs looked at them so it's not that they need it explained what it is, it's that they still don't like it for good reason.
However, it seems like there may be some sort of threshold listed in the reporting requirements.
Would it be legally possible to allow your users to use the enhanced functionality of your platform up to the edge of that threshold?
Cutting off access to the premium services that the sellers of erotic coo-coo clocks (or whatever) have come to value might incentivize them enough to overcome the 1099-K hurdle. You could make the process gentler by constantly displaying the amount of revenue left that they can transact before being cut off.
Be careful though. Cutting off access will equally incentivize users to bypass the restrictions you've put in place by creating multiple accounts, etc.
Lacking the above you could also try to focus on the part of your platform the sellers do want to use and sell a premium tier to sellers that has features that would make them stand out to buyers. For example premium users could have flair (think something akin to a verified checkmark) next to their listings in searches and the ability to post an extra video of their clocks.
Some tax on residency after a set time of stay, but entitle you to community services (Canada).
Others tax on citizenship, and are still binding in the country of birth even if you have dual citizenship (USA).
The US now has a per state and federal tax withholding obligation for international eCommerce businesses selling to US customers as of 2019. The amount and customer sale count grace thresholds vary state to state, but failure to file a US federal return (even for $0 taxable revenue) as a non-US company is still a $10k fine.
Don't YOLO this one, talk with the US chamber of commerce rep for the areas you want to export/import into.
People may not like taxes... but they will hate the fines, seized shipments, or jail even more. In many cases, the withheld taxes can be recovered if the buyer can prove the destinations tax rules were incorrectly applied. ;)
It's a buying and selling platform, similar to eBay, but the platform only connects buyers and sellers, but doesn't do payments or complete the sale.
Therefore, they have no reporting requirements (since they have no idea if those sales completed or not).
Perhaps allow customers who are scared of government paperwork to put your platform into a mode that allows that?