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How to Make Sure Your eBay Biz Is Legal

Online retail is not a free-for-all. Get your business off to a smooth start--and stay out of trouble--by understanding some basic legal and tax rules.
August 31, 2005
URL: http://www.entrepreneur.com/article/79562

Rules? You mean there are rules? Sorry, but the answer is yes. A lot of people think the internet is a parallel universe free from regulation of any kind, and they are shocked--shocked!--to learn that you can get into legal trouble if you're not careful.

When doing business on eBay, you are engaged in a retail business and are therefore subject to all federal, state and local laws and taxes that apply to retail businesses. In addition, eBay has its own set of rules--and they're often more restrictive than what the law permits.

The following legal and tax tips will help you get off on the right foot:

1. Name your business. You cannot use someone else's name for your business without their consent, so make sure your business name is truly original.

First, you should visit the U.S. Patent and Trademark Office website to make sure no one else has registered a trademark for the name. If someone has, it is absolutely illegal for you to use that name in commerce. If nobody has, consider getting a federal trademark--it should cost less than $1,000 and will prevent anyone else from stealing your name down the road.

Then, make sure your name is available as a web address by checking Network Solutions or Register.com. Next, check with your state secretary of state's office to make sure no corporation or limited liability company is already using your name. Then, visit your town or county clerk's office to ensure no sole proprietor or partnership has filed a trade name or dba certificate for their business under the same name. Finally, don't use the word eBay or anything similar to it in your business name.

Don't steal someone else's name, even if he or she hasn't taken steps to protect it legally. Competitors may be able to sue you for infringing a common law trademark or "misappropriating their trade dress," especially if they're also planning to sell online and establish a national or international brand under that name.

2. Form a legal entity. Most eBay sellers are sole proprietors or informal partnerships between spouses or family members. However, if you're partnering with someone you're not related to or don't trust 100 percent, you may want to consider forming a corporation or LLC so your personal assets will be protected against any lawsuit that results from your partner's bad behavior.

3. Get a license, if needed. If you are taking other people's consignments or buying large quantities of goods for resale on eBay, you may need to get an auctioneer's license from your state. (For details, see my article " Do You Need an Auction License to Sell on eBay? ".) Also, if you are dealing in goods that, if abused, may injure someone (such as alcohol, tobacco, cars, boats, firearms or used manufacturing equipment), you may need a special license from the state to sell them.

4. Make sure you can sell it legally on eBay. Check out a detailed list of items that cannot legally be sold on eBay at http://pages.ebay.com/help/sell/item_allowed.html . If there is a risk that you are selling items (such as knockoff handbags, bootleg CDs or "genuine Rolex watches" you purchased for $5 apiece) that may infringe on someone else's trademark, eBay's Verified Rights Owner (VeRO) Program enables you to contact the trademark owner (and vice versa) to verify that the goods are indeed genuine.

5. Remember that a bid is a legal contract. If there's at least one bid on your item, eBay discourages you from withdrawing the listing unless you e-mail the buyer(s) and give a genuine reason for doing so. (For example, "An expert told us this item wasn't what we thought it was, and we have withdrawn the item for further study.") Similarly, if you are bidding on someone else's merchandise, you can withdraw your bid only for a limited number of reasons, or you must contact the seller and obtain permission to withdraw.

6. Avoid fraud and illegal listing practices. When setting up your eBay listings, don't make extravagant claims about the goods you are selling. These may be construed as legal warranties, and your buyers will have the right to return the goods (or flame you on eBay's Feedback Forum) if the goods don't strictly comply with your descriptions. Even if you don't make any express warranties about your merchandise, the law may imply certain warranties unless you specifically include a disclaimer about them on each eBay listing page.

If you're tempted to engage in illegal or questionable listing practices--for example, having a "shill" (a friend, neighbor or family member with a different e-mail address) bid against legitimate bidders in your listings to drive the prices up artificially--don't even think about it! In many states, eBay has teamed up with the attorneys general to shut down sellers who break the rules. If you're caught, not only will you be permanently booted off eBay, but you may also be subject to criminal prosecution for auction fraud.

7. Watch out for taxes. If you put something up for sale on eBay and the winning bidder is a resident of your state, you must pay your state's sales tax on that transaction. That means you must register your business with your state tax authority. You should also place the following statement on each listing page: "Residents of [your state] must add ___% sales tax to their winning bid amount." In addition, eBay provides an option to include your state sales tax during the listing process. If you don't warn your buyers that you will add sales tax to their winning bid, you may not be allowed to pass the sales tax on to your buyer, but will instead have to deduct it from your profit on the sale.

You will also have to deliver a resale certificate to the vendors from whom you buy items for sale on eBay so that they don't charge you sales taxes. The form is usually available as a free download from your state tax authority's website. (To find this site, go to www.natptax.com/state_information.html , and click on your state; when you get to your state's site, click on "Forms and Publications.")

Any profits you make from your business on eBay must be reported as income on your federal and state income tax returns. If you lose money, you may be able to deduct your losses against your income from other sources (such as a day job), provided the IRS views your eBay activities as a business and not a hobby. (See my article " Do You Have a Business or Just a Hobby? ".)

8. Keep in mind, different laws and customs apply when selling across national boundaries. For example:

Make sure you hire a good accountant and business lawyer before starting any business online, and stay in touch with them as your business grows.

This article contains general information only and should not be relied on as legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.

Suiting Up: A Legal Checklist

Launching a new business is time-consuming enough--you don't have the time to become a legal expert, too. Here's a checklist of legal and tax tips to help you start your business on eBay: