App Sales in multiple states

[ahmadka2]

I'm a full-time software engineer, but last year as a hobby I put up an app for sale on the Apple App Store, and it was sold everywhere through Apple. Collectively, all app sales from across the world generated about $145.55, of which I received $102.10 after Apple took their commission.

All the US based purchases where from 11 different states, but all the amounts I earned in those states are very small. The states where the app was sold and the total sale amount (what Apple charged customers, excluding any sales tax) were:

Texas	$43.70
Alabama	$13.92
Illinois	$13.92
Utah	$11.92
Ohio	$10.91
Maryland	$8.97
Louisiana	$5.98
Washington	$4.95
Indiana	$3.98
Tennessee	$3.96
Michigan	$1.98
District of Columbia	$0.99

Please note that I'm a resident of Washington state, where I lived completely last year. So for all other states mentioned above, I'll be a non-resident. Every state has different rules, so I'm trying to figure out for which states from the above do I need to file state taxes and mention the 'income' I earned in that state ?

[MarilynG1]

Since your business is Self-Employment and Income/Expenses are reported on Schedule C, you are considered to have earned all of your income from your home office in Washington.

You don't need to file a return in these other states.

If you receive a 1099-K from Apple reporting your sales revenue, here's more detail on What Online Business Owners Should Know and also Sales Tax 101 for Online Sellers you may find helpful.

[ahmadka2]

Thankyou for your reply, however based on my previous thread ...

https://ttlc.intuit.com/community/business-taxes/discussion/re-threshold-for-reporting-app-earnings/...

I'm not yet sure if I'll declare the income from the app as 'self-employment income' or 'hobby income'. But regardless of that, would what you're saying also apply if I were to file this income as 'hobby income' ?

Also, in what condition would a non-resident of a state need to file a non-resident state tax return for that state ? Isn't an app sold considered a source of income from that state ?

[ahmadka2]

Hi @MarilynG1 waiting for your reply

[MarilynG1]

For hobby income, you can't claim expenses over the amount of your income, so basically you break even; you're just reporting.  If you have less expenses than income, you'll pay tax on that income. 

Here's more info on Hobby and Other Types of Income.

As far as what a state considers 'state source' income, it is income derived either from working in that state or working for a business in that state.  So if you were a remote employee of a California firm and lived in Ohio, for example, then you would file a Non-Resident return to CA for your 'CA source' income. 

In your case, the source of your business is your app, produced and developed in your state, in your home office. 

Here's more info on Why Would I File a Non-Resident Return?

@ahmadka2 

[ahmadka2]

Hi @MarilynG1 thanks for your answer.

Thanks for clarifying the ruling about state taxes. I guess that simplifies things for me since I won't have to file any state taxes.

1) Regarding hobby income, can I claim expenses/deductions on it ? In the other thread I linked to previously, I was told that for hobby income I cannot claim any expenses or deductions.

2) Secondly, can you suggest whether it's better for me to declare this income as hobby income or self-employed income (Schedule C) ? Even though I made a paid app, I don't depend on the money made from it (which is too less anyway - $102.10), and I think of it more as a learning experience or hobby to see how much I can earn from it, and to see if I can make it's earnings grow without spending much time on it. Yes I can change it's price or something, but I don't advertise it or treat it as a business or something. So which type of income should I report it as ? Which is 'safer' from IRS's perspective ? As hobby income or self-employed income ?

3) In the other thread it was mentioned that if I declare it as hobby income, then I pay taxes based on the gross amount customers paid Apple ($145.55), which is more than what I actually received ($102.10) after subtracting Apple's cut. In other words, I'm charged on an income amount I didn't actually receive (Apple's cut). Is this correct ? Why would the IRS want to charge me tax for an amount I never received ? What's the justification ? Any IRS article/example to back this up ?

[MarilynG1]

You can claim hobby expenses, up to the amount of income.  Save receipts for both income and expenses.

Many people have small businesses.  It's not a red flag for the IRS as long as the expenses seem reasonable for that type of business.   In your case, internet, cell phone, office supplies, etc. would be reasonable.

No, you don't need to report income you didn't receive for hobby income.  Just keep documentation of what was paid out of your gross revenue.

Here's IRS Tax Tips for Hobby Income and Quick Links for Self-Employed and Gig Workers. 

@ahmadka2