Zazzle, now also holding taxes

[donding]

I found this but it doesn't really say US only sales. maybe Zazzle considers the payments as "compensation for services" rather than a commission on sales.
http://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States
It's not the IRS website just so you know that.

Withholding on payments to foreign persons

Companies and individuals who make certain types of payments to foreign persons must withhold Federal income tax on those payments.[14] Foreign persons include nonresident aliens, foreign corporations, and foreign partnerships.[15] Payments subject to withholding include compensation for services, interest, dividends, rents, royalties, annuities, and certain other payments.[16] Tax is withheld at 30% of the gross amount of the payment. This withholding rate may be reduced under a tax treaty. This tax withheld is usually considered a final determination and payment of tax, requiring no further action or tax return by the foreign person.[17]

In addition, partnerships are required to make tax payments (referred to as withholding) on behalf of foreign partners.[18] These payments are required when the above type of income is distributed to the partner. Payments are also required quarterly or at year end for business income or other undistributed income. Partnership payments on business income are treated like estimated tax payments, and the foreign person must still file a U.S. tax return reporting the business income.

Purchasers of U.S. real estate must withhold 10% of the sales price from payments to foreign sellers.[19] This amount can be reduced to the anticipated Federal income tax due, upon advance application on Form 8288-B to the Internal Revenue Service. These payments are treated like estimated tax payments, and the foreign person must still file a U.S. tax return reporting any gain or loss.

[madelaide]

Guys, maybe you can help me with the complicate legal English at the IRS site.

I was browsing the information about Individuals, then I clicked on International Taxpayers, what moved me under the Business tab. Then on to Non-resident Aliens (I'm an alien ):

Which Income to Report
A nonresident alien's income that is subject to U.S. income tax must generally be divided into two categories:
    * Income that is Effectively Connected with a trade or business in the United States
    * U.S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)

In the first, I read:

Effectively Connected Income (ECI)
Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI). This applies whether or not there is any connection between the income, and the trade or business being carried on in the United States, during the tax year.

Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as ECI. You usually are considered to be engaged in a U.S. trade or business when you perform personal services in the United States. Whether you are engaged in a trade or business in the United States depends on the nature of your activities. (...)

The following categories of income are usually considered to be connected with a trade or business in the United States. (...)
    * If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States.
    * You usually are engaged in a U.S. trade or business when you perform personal services in the United States (...)

Would our activity either at stock or POD fall into either of the two? The other options they have do not apply. Given what another document says:

A partner that is a foreign person should provide the appropriate Form W-8 (as shown in Chart D) to the partnership.

and given that I am required to fill in the W-8BEN shown in Chart D, I would suppose I am a "partner", but it doesn't sound right.

And on:

Applicable Tax Rate

Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the graduated rates that apply to U.S. citizens and resident aliens.(...)

There is a link on that page to Source of Income , and I understand either stock or POD falls into income from copyrights (Table 2-1), and also:

Rents or Royalties
(...)U.S. source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property.

I wonder if Zazzle consider that they, and not the buyers, are paying me royalties.

In the second, I read:

Fixed, Determinable, Annual, Periodical (FDAP) Income

(...) Tax at a 30% (or lower treaty) rate applies to FDAP income or gains from U.S. sources, but only if they are not effectively connected with your U.S. trade or business. (...)
The following items are examples of FDAP income:(...)
    * Royalties(...)

Then there is a long document called Publication 515 (2010), Withholding of Tax on Nonresident Aliens and Foreign Entities, but I got lost there.  :'(

[madelaide]

And a new reply from Zazzle support:

At this point, I have contacted my Finance Team with regards to your concern, and unfortunately the Tax stands. This is a tax that is imposed by the IRS. You are welcome to contact them for further assistance.

This was an answer to:

I think you are missing the point of my complaint: the tax should apply ONLY to transactions done in the USA.
Many sites are witholding taxes, but only Zazzle is charging earnings from any sale. Even other sites based in USA like Zazzle are withholding taxes ONLY from sales originating in the USA. Maybe it's a miscomprehesion by Zazzle accounting department on the IRS rules.

[Suljo]

So are they stupid or they are acting stupidity or they are scum site?

[donding]

Madelaide

IRS tax laws can be interpreted in so many different ways. Even the people from the IRS don't know which law is interpreted which way. I'm sad to say but, that is the IRS.

"I wonder if Zazzle consider that they, and not the buyers, are paying me royalties."

That is probably the way they look at it. Since they are selling tangible property which is not something you can download over the internet like microstock, then maybe this is considered royalties paid to you from Zazzle for sales they make. I don't know if that is why they do it this way or not, but that may be the difference. They aren't selling a license but a product.

[Maui]

That is probably the way they look at it. Since they are selling tangible property which is not something you can download over the internet like microstock, then maybe this is considered royalties paid to you from Zazzle for sales they make. I don't know if that is why they do it this way or not, but that may be the difference. They aren't selling a license but a product.

This could be the key, yes. They are selling products which are made in the US, and which only use our images. Very different from microstock.

[gill]

I see it now - it's taken me a long time to work this out!
So in effect, Zazzle are buying the license to use your image and paying the royalty, and where they sell the product (with a mark-up to cover the cost of your image use) is only between them and the tax office, whereas with a license to use the stock image, the buyer is paying the royalty.
I think I've got that right.

[madelaide]

But our share of the sales is our artwork, our designs, our creations - that is our intellectual property! We don't make money on the physical product, only on the image that goes with it, for which we set a mark-up. Zazzle acts like an intermediate, providing the final product to the buyer. They are making them at USA (as I read, everything is manufactured there), so for them all taxes apply. However, the portion of the product that is our IP, it doesn't matter where the physical product is being shipped from, a buyer outside USA is buying it from a "non-resident alien".

[lock_stock]

it seems that even IRS not really sure how it works cause I still didn't receive nothing but

due either to unusual demand or the nature of your question, we have not been able to respond within the normal time.

[madelaide]

Hmm.  Zazzle removed my thread about the taxes.  Another member had written a text from IRS site (if I remember it) that would prove they should not tax non-USA sales.

[click_click]

I haven't read every single post as this tax stuff is way too confusing but is there a slight possibility that you are being taxed because all these items are also manufactured in the US?

AFAIK, everything is being printed here in the US even when ordered in Australia or Europe. Shipping times are ridiculous and I'm really surprised to see so many European sales. Considering shipping times and prices doesn't make Zazzle products very attractive.

[madelaide]

I don't think Zazzle is considering this aspect, at least judging by their replies, it seems it's more about the facr that all sales ultimately are processed in USA, as Zazzle intl sites are actually just mirrors. But the member posting in my thread has a solid point (I think it was text from IRS) and Zaz
zle deleted the whole thread.

[madelaide]

Emailed Zazzle support last night about the thread being deleted, no reply. Odd from them. 

[madelaide]

This is what IRS replied to another Zazzle member, but Zazzle chose to ignore and remove my thread. Do they need anything clearer from IRS?

Income from royalties is sourced where the property is used not where
the property originates. Copyright royalties paid for a property which
is used in the U.S. is sourced in the U.S. and is taxable in the U.S.
Royalties paid for a property used outside the U.S. are considered
foreign source income and are not taxable in the U.S. to a nonresident
alien.

[Karimala]

Ding ding ding!!! We have a winner!!!   

You're right, Adelaide, and Zazzle is wrong.  Plain and simple.

[rubyroo]

Income from royalties is sourced where the property is used not where
the property originates. Copyright royalties paid for a property which
is used in the U.S. is sourced in the U.S. and is taxable in the U.S.
Royalties paid for a property used outside the U.S. are considered
foreign source income and are not taxable in the U.S. to a nonresident
alien.

I have not participated in Zazzle, but just wanted to say that in ALL the information I've seen go back and forth on this issue with the agencies, this quote seems to be the most useful statement that's been uttered by the IRS.  That sounds pretty definitive.  It would be worth copying this somewhere safe for future use.

[sobm]

earning super little money to pay American to buy weapons or what?
come on for god sake, pres Obama please give us a break ... come on , please!!

[madelaide]

I don't care how USA spends their tax money, I just don't want to be charged incorrectly like Zazzle is doing.

[Magda]

This is what IRS replied to another Zazzle member, but Zazzle chose to ignore and remove my thread. Do they need anything clearer from IRS?

Income from royalties is sourced where the property is used not where
the property originates. Copyright royalties paid for a property which
is used in the U.S. is sourced in the U.S. and is taxable in the U.S.
Royalties paid for a property used outside the U.S. are considered
foreign source income and are not taxable in the U.S. to a nonresident
alien.

Maria, this is what I understood so far from the Zazzle forum discussions:

The word "property" in the IRS statement refers to your intellectual property (images, concepts etc.) and not the printed products with your IP on them. You receive 100% of your royalties from a single source - Zazzle -, an American company who uses your property to produce and sell printed products in California. You do not receive royalties from the individual international customers because you don't license your images ("property") directly to the buyers as you do in microstock, you license them to Zazzle. In other words, Zazzle is for you what a buyer is on microstock.

Unfortunately, Zazzle doesn't have any branch or production line outside the U.S., that would have changed the facts. The international domains are just mirror sites.

They promised some updates though so let's hope they will find a solution for the sellers who live in non-treaty countries.

[madelaide]

Magda,

Royalties paid for a property used outside the U.S. are considered foreign source income and are not taxable in the U.S. to a nonresident alien.

Regardless if property means Intellectual Property or a physical item shipped to oustide USA, according to the above, it is not taxable to a "nonresident alien" such as myself.  Or is there something in the text that I don't understand?

[Magda]

Magda,

Royalties paid for a property used outside the U.S. are considered foreign source income and are not taxable in the U.S. to a nonresident alien.

Regardless if property means Intellectual Property or a physical item shipped to oustide USA, according to the above, it is not taxable to a "nonresident alien" such as myself.  Or is there something in the text that I don't understand?

Ok, I will try to explain again what has been explained to me:

IRS considers that used = where sold, under real inventory

Your property is not used outside of the U.S. It is used by Zazzle in California.
Your source of income is only one: a U.S.-based American company. All of your royalties are generated and calculated in California only, so there is no foreign source income earned.

The end-buyers are paying Zazzle for services/products.
Zazzle pays you for the design.

[madelaide]

Magda,

Who explained this to you, Zazzle? It seems to be their interpretation, but I (and others) disagree. And someone else mentioned another POD site that also does not collect taxes from US sales.

[Magda]

Maria, this tax issue has also been discussed in the ProSellers forums and although I'm not directly affected, I followed the discussion. The quoted paragraph regarding foreign income for nonresident aliens has been brought up by other international sellers and that was the answer / explanation given by Zazzle. It's probably the IRS' interpretation, not Zazzle's.
I really hope they will find a solution, I reckon it must be quite disheartening.. 

[madelaide]

Magda,

It is disheartening to have a discussion thread removed without explanation and not receiving any further reply from Zazzle about the subject.

It is much simpler for site programmers and admins to do what they are doing. Probably very few people are affected by this - those, like me, who can not receive any compensation from having a part of their earnings cut without apparently a fair reason.

[lock_stock]

Maria, this tax issue has also been discussed in the ProSellers forums and although I'm not directly affected, I followed the discussion. The quoted paragraph regarding foreign income for nonresident aliens has been brought up by other international sellers and that was the answer / explanation given by Zazzle.

That was only one interpretation given by one of the sellers, not by zazzle or lawyer.

The problem is that from the very beginning zazzle insisted that the reason all royalties considered U.S. income is that all products sold via U.S. site ( U.S. domain) and royalties generated/calculated in U.S. as well. These arguments are absolutely not relevant according to IRS 519 publication (Publ. 519, U.S. Tax Guide for Aliens). Moreover, IRS replied to the specific question about this issue: U.S. sourced royalties paid to a nonresident alien are classified as income which is not effectively connected to a trade or business in the U.S.

As to the word "used" - it also can be easy interpreted as intellectual property (i.e. product design) used by the customer that purchased it. For example, biz cards purchased by an European customer with my design on it are used by customer in Europe.