Android Market and Taxes

A fellow developer wrote me today and said:

I have had some success with one of my apps and I'm starting to get concerned on how I should be handling taxes. Do you have any links you could suggest on how I should be reporting income and sales tax?

Disclaimer here: It is entirely possible I have no clue what I'm talking about, so you should take everything I say with a huge grain of salt.

Near the end of 2009, when my apps started doing reasonably well, I began to investigate tax issues. It's hard to find decent information and get clarification from Google, so your best bet is to find either a good tax attorney, CPA, or both if you are generating enough revenue to be worried about it. If your apps are making less than $5K a year, then you're probably well under the radar.

Anyway, last summer I formed an LLC as the sole member, and basically my taxes on my company's income were treated the same as an individual. This year I've hired a local CPA who advised forming an S corporation, which will supposedly save on paying self-employment taxes and end up costing me less in taxes than I would as an LLC. No matter how you handle it, if you're making a substantial amount of money, you need to be declaring it and paying taxes on it.

As for sales tax, that's pretty murky. I searched around quite a lot in various forums, and ended up with the following understanding: Developers selling apps through the Android Market are responsible for collecting any associated sales tax as a result of each sale. I am based in Louisiana, so I contacted the Louisiana Department of Revenue and the representative I spoke with confirmed that I am responsible for collecting sales tax on transactions that take place in the same state in which my company is based. So basically I collect the 4% sales tax on app sales in Louisiana. I file monthly sales tax reports through the LDR website, basically reporting $X in gross sales minus $Y in interstate and international sales, which are exempt from taxation in Louisiana. The sales tax can be set up in the Google Checkout console (Settings tab, Tax Setup). Then, because reporting is so abysmal in Google Checkout, I manually look up the number of sales of a given app at its taxed price. In other words, at the end of each month I search Google Checkout for all apps sold at $1.03, which are all my $0.99 apps plus the 4% sales tax. I manually count these sales because I am not able to generate a CSV report and export it from Google Checkout. This is, of course, a crapload of fun. I should probably just be thankful I only have to collect sales tax in my state, and not for every state, country, and territory.

So I do business under the assumption that I do not either need to collect or pay sales tax in states or countries other than the one in which I am based. Google has not done a good job communicating tax liabilities to developers, so if this information isn't correct, I'm not in very good shape, and neither is the Android Market. Hopefully it is the way we're supposed to be doing business. This is one area where the iPhone app market is clearly superior. Apple apparently collects any necessary taxes associated with sales, handles currency conversions, and provides developers with very clear itemized monthly sales reports. Google is taking a much more laissez faire approach, and if it ends up biting some developers in the butt because they're not handling their taxes right, that would be damaging for everyone. I just figure I've done due diligence and look at potential unforeseen tax liabilities as a mitigated risk.

Anyway, that's my understanding of how things work and a description of how I currently handle taxes. I'd be interested in hearing other stories or getting any clarifications from anyone who knows better.