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Do sales tax exemption rules apply in the metaverse?

The summer sales tax holidays are about to kick into full gear. Nearly 20 states will grant 27 sales tax holidays in July and August, fully or partially exempting everything from clothing and school supplies to food and fuel. During a tax-free period, such as a tax-free weekend, registered retailers selling the affected products must comply with the terms of a sales tax holiday, whether they sell in a physical store, online or in the Metaverse. .

International consulting and accounting firm Prager Metis describes the Metaverse as “a central virtual marketplace and social forum where people and entities from around the world can come together to socialize, play, learn, access entertainment, and trade. goods and services”. Like it or not, what happened during the pandemic shows just how beneficial these virtual spaces could be. Even now, many of us are working from home and socializing via Zoom.

As always when new opportunities and technologies emerge, there are both early adopters and followers. While some companies still don’t know how to make the metaverse work for them (i.e. be profitable), others are actively selling non-fungible tokens (NFTs), unique pieces of digital data recorded and stored in a blockchain.

Nike is one of many brands selling through the Roblox online platform, a space created for both gaming and commerce. Nike made headlines last year when, for six lucrative minutes in the virtual kingdom Nikeland, it sold 600 pairs of NFT sneakers for a total of $3.1 million.

Gap Inc. began testing the virtual waters with digital hoodie NFTs in January 2022. You can’t dress your avatars in these hoodies just yet – Gap would have to “develop its own virtual domain or find a way to make its NFTs compatible with existing domains” to make this happen. However, anyone who purchased enough NFT collectibles could earn “access to purchase an Epic NFT limited edition” and ultimately “claim the physical hoodie co-designed by Brandon Sines”, creator of Frank Ape.

Clothes aren’t the only products that straddle the virtual and real realms. This spring, Heineken launched what could be the world’s first virtual beer at Decentraland. The company doesn’t shy away from calling Heineken Silver an “ironic joke”, but Heineken Silver isn’t just about the best pixels: Heineken Silver is sold in real life (IRL) at exclusive events across Europe.

Since companies are now selling all kinds of products in various virtual worlds, and some of these transactions are spilling over into the real world, companies interested in entering the metaverse should consider the following:

  • Are Metaverse sales subject to sales tax?
  • Do sales tax exemptions apply to Metaverse sales?
  • How are metaverse sales generated?

Are Metaverse sales subject to sales tax?

Most states have not yet clarified whether the tax applies to sales made in virtual worlds like Decentraland or Nikeland. This does not mean that such sales are necessarily exempt.

Many states have relatively clear policies governing the taxation of digital goods and services, such as an e-book or streaming movie. For example, the 24 Streamlined Sales Tax (SST) member states have specified how they tax digital codes, products and services. Scott Peterson, vice president of government relations at Avalara and former executive director of the simplified sales tax board, says SST states likely believe they have provided all the guidance necessary to determine taxation, for example, of a virtual car. (Yeah, that’s one thing.)

But David Lingerfelt, Avalara’s senior director of North American tax content, isn’t convinced. “An NFT is a unique digital asset, not a digital token that you can exchange for a digital property,” he explains. If the SST now considers an NFT to be a “digital code”, it should clarify this. “Failure to do so invites tax controversy.”

Then there’s the fact that many companies operating in the metaverse “focus on marketing to drive real-world sales. For example, musicians give concerts on virtual stages to promote their albums… [and] clothing brands are taking part in virtual fashion shows to generate interest in their latest duds.

Peterson points out that although many states do not tax intangibles, they do tax transactions related to the sale of tangible personal property. In addition, the intangible asset of one State may be the tangible personal property of another State; apart from ESS member states, there is little consistency in how states define the term “intangible”.

The more money changes hands in the metaverse, the more the tax authorities will take notice. And according to Peterson, declares are talk about NFT.

Does a sales tax exemption apply to Metaverse sales?

All states with a general sales tax have economic ties and market enabler laws that tax sales made through online stores and marketplaces. Therefore, it’s not hard to imagine states expanding their laws to tax sales made through the metaverse, which is made up of online platforms.

If they really must.

Peterson thinks that at least some states would assume that existing laws can be applied to new technology. States may not see the need to clarify policies they already consider clear.

Lingerfelt says NFTs aren’t your average digital code. This is a new technology, which means that existing sales tax laws may not adequately cover them. He thinks states should tackle the imposition of NFTs head-on, because the longer they wait, the more costly the battles will be.

Both experts are probably right.

It’s taken years, but most states have identified how sales tax applies to digital goods and services. Some states have enacted new laws; some have developed their position on the basis of existing law.

Yet states also have priority in taxing transactions that had not previously been identified as taxable. Last fall, for example, the West Virginia state tax department clarified that while digital products are exempt from sales and use tax, streaming services are taxable. This contradicted previous advice; Previously, the department suggested that sales tax did not apply to streaming services.

And the trials? They arrive. Already, Nike is suing an online marketplace reseller for selling NFTs based on Nike shoes. The case is not about sales tax, but it depends in part on what an NFT is. The battles over the imposition of NFTs cannot be far behind.

So if you sell an NFT of a hat, or an NFT of a hat that entitles the consumer to purchase a hat in real life, sales tax may apply to one of those sales or both. Similarly, any qualifying transaction made through the metaverse could be fully or partially exempt during the tax-exempt period.

It is in your interest to collect applicable sales tax on taxable sales and to exempt non-taxable transactions. State tax authorities will ensure that you do so. If you are unsure which sales to tax, consult a trusted tax advisor or the state Department of Revenue.

How are metaverse sales generated?

Ah, but which Ministry of Revenue? One of the most diabolical things about selling intangible personal property is that sellers don’t need to enter the buyer’s physical address.

Most states base sales tax on the destination of the sale – where the purchaser takes possession of the goods or receives the service. But you don’t need a physical address to sell someone an e-book or avatar skin. So how do you find a sale if you don’t know where the sale is?

Lingerfelt believes that “zip code sourcing for digital real estate transactions is inevitable.”

One of the things I admire about David Lingerfelt is that he thought of sales tax when he aired the Netflix show “Squid Game” during a robbery. If Netflix was shipping tangible personal property to him, he would need his street address and base the sales tax on that address. But he knew that Netflix only had his name, email address, zip code, phone number and payment method, not his physical address. So how should Netflix find the sale of a service accessible anywhere it can connect to Netflix?

Netflix’s policy directs sales to where the digital property was originally made available for transmission. But is it Lingerfelt’s home address or an airport where he may have first felt the need to have a Netflix account? Because people are always on the move, Lingerfelt thinks it makes more sense to base sales tax on the buyer’s zip code. At the same time, Lingerfelt knows this would result in “the loss of accurate sales tax calculations for digital real estate transactions.”

Supply is just one issue that states will have to deal with when they start taxing sales in the metaverse (assuming they do, which is likely for most states).

Although some of us are still trying to figure out what the metaverse is, others are already selling a range of items in virtual worlds. Some of these products, tangible or intangible, may be subject to sales tax. And some may benefit from the total or partial exemptions provided by the sales tax exemptions.

Like it or not, the metaverse is here. Learn more about how this affects real-world sales tax obligations in Taxing the Metaverse: The Basics, and Selling goods in a virtual world can have real-world tax implications.


Gail Cole is a senior writer at Avalara. Her mission is to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals.

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