Designing a great game is hard work. It takes creativity, tenacity and tons of coffee. While the result may be beautiful, ultimately you have to pay for all the caffeinated beverages consumed – the monetization element of a game might be as important as creating the main character. It’s a $200bn industry and growing, so obviously many creators have found a way to earn – but whenever there’s revenue, someone is going to want to tax it…
When is sales tax applicable in gaming?
When you monetize your game, you might have paying users based all over the world. Therefore, it is important to understand your tax obligations. Most importantly, you need to know if there is any kind of sales tax or consumption tax you should be adding when a player pays for something.
Most countries in the world have a VAT system, and this tax needs to be considered for you international players. The USA has Sales Tax that is governed at a state level, so game makers need to understand if they have any obligations based on their sales to every US state.
Under certain circumstances (depending on the specific legislation of the country or state), the local tax office can impose a legal obligation on the merchant to register for and start charging the relevant local tax.
For example, if your gaming revenue meets certain definitions and the sales activity is high enough, you could trigger what is known as “Nexus” in a US state. When you have sales tax nexus in a state, then for all sales made to customers in that state sales tax must be added to the sales price. The rate of tax to be used is based on the address of the customer and the type of gaming revenue.
If the game is not compliant – the merchant fails to register and add tax where required – then the business can be severely penalised and the tax office may even have the jurisdiction to ban the game in their state.
What kind of gaming revenue is sales tax applicable to?
This is where things get complicated. The taxability of so-called ‘Digital Products’ is too complicated to go into now, but there are certain hacks you can use to flag areas of concern. For example, if your game is exclusively monetized via an app store or gaming platform, then it is likely they will be responsible for the taxes. If there is an option for players to pay you directly (whether it be for the download, in-app or subscription) – then the sales tax burden is going to fall on you.
The 5 most important gaming revenues to consider are:
- Purchase price (to download or access the game)
- In-game purchases
- Subscriptions
- Advertising revenue
- Merchandising
Advertising revenue is the most popular form – especially when it comes to Free-to-Play games (“F2P”) – but also the most complicated. There are various types of ad revenue, including display advertising, video pre-rolls, and branded content, but in general, most ad revenue will not be considered taxable for sales tax in the USA. However, according to this Forbes article, this could change very soon.
It will depend on specifics and the states where your players are based, but if you have any of the other revenue lines for your game, you could have sales tax obligations.
What is the process to add sales tax when customers pay?
Sales Tax is complicated because there is no uniform rate – every state has different rates, and even within states – the tax is calculated based on the specific locality’s rules. For example, depending on the address of the customer, a different rate can apply. There are tens of thousands of taxing jurisdictions in the USA and depending on the revenue your game is generating, you might have to charge several different tax rates to different players.
It is impossible to decide manually what sales tax rate to apply – therefore, once you are compliant and have registered for sales tax, your game or platform must be programmed to charge sales tax in the states where you have nexus.
What software development or integration is required to charge sales tax correctly?
The way sales tax works is that the seller must add the relevant amount of tax to the price, and this depends on where the player is based and what the revenue relates to. For example, an in-app token purchase might be taxed at 5% in a specific taxing jurisdiction – so if the price of a token is $1, you will need to charge the player $1.05.
There are two options for game developers:
- You can program the game to add sales tax based on where the player is. General rules can be applied for this option (you do not need to code this to the address code level – state rates can be used). When going this route, you will need to review your process to invoice/charge a player and implement the rules (once-off) so that sales tax is added during this billing process. You will need a process to review these rules regularly to ensure they are compliant with the most recent tax legislation.
- You can implement an integrated software that calculates the specific and accurate sales tax rate that applies based on the type of revenue and your player’s exact address. Although this will result in a more accurate point-of-sale tax being added – integrating this point-of-sale software with your game and/or billing platform can be exceptionally complicated.
Why charging sales tax on gaming revenue is not enough
Charging sales tax when you players pay is only one very small part of a big Sales Tax puzzle. Firstly, you need to know where you have nexus – and this is an ongoing requirement since you will have to monitor your sales activity in all states so you know if you have to start charging sales tax in new states.
Once you understand your sales tax obligations, you have to get a sales tax permit by registering with every state. Once registered, you have an ongoing compliance obligation: you have to file a sales tax return with each state where you report the amount of tax you charged and remit the funds to the tax office. These returns are filed monthly or quarterly in most states.
You are not allowed to charge sales tax if you have not registered in a state, and you have to file tax returns every period even if you haven’t made any sales – therefore it is crucial that you see your sales tax obligation and more than simply adding the tax at checkout.
What is the risk of not complying with sales tax rules?
The US state tax offices are clamping down on businesses who sell to their states and don’t charge sales tax when they are supposed to. Many of the states have formed task forces that are using bots and other methods to scrape the internet to identify games, apps, and platforms that are not adding sales tax when legally required.
Once they identify a merchant who is not compliant, they can bill you for the tax you should have charged and impose penalties. In some cases, they can take other action, including blacklisting your product or even shutting down your site or platform.