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1099 law will affect hobby manufacturers, dealers and distributors

By Hal Miller
Published: August 11, 2010
U.S. business has a little over a year to prepare for a flood — not of water and mud, but of paperwork, thanks to a small provision inserted in the health care reform law passed this year.

According to several reports, Section 9006 of the bill, which amounts to a few lines in the 2,409-page document, mandates that in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.

The big-picture ramification of the little provision means businesses will have to issue millions of new tax documents each year. This will affect everyone in the hobby industry from the largest distributors down to the stores on Main Street.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Currently, IRS Form 1099 documents income for individual workers other than wages and salaries. But under the new rules, a hobby dealer that buys R/C cars each week from a distributor will have to send the supplier a 1099 at the end of the year tallying up the purchases.

If you’re a distributor buying from 300 different companies, you can imagine the impact this will have, even with automated systems to churn out the 1099s. The impact will be no less onerous on the stores.

“Small businesses such as those indigenous to the hobby industry cannot afford the extra labor or time to process hundreds of 1099 forms,” says Michael Bass, President of the Hobby Manufacturers Association. “The number of vendors per hobby shop where over $600 of goods are purchased per year is well over 100, creating a bookkeeping mess as well as an increase in expenses.“

Bass says the move appears to be a way for the federal government to shift the burden of its tax collection responsibility to the business owner.

The IRS estimates that the federal government loses more than $300 billion each year in tax revenue on income that goes unreported. The hope is that the new law would reduce fraudulent deductions and expose unreported income.

Two legislators are moving to have the law repealed. Senator Mike Johanns (R-Neb.) has introduced S.3578, The Small Business Paperwork Mandate Elimination Act. Representative Daniel Lungren (R-Calif.) has introduced H.R. 5141, The Small Business Paperwork Mandate Elimination Act. Either would repeal the 1099 law.