Decision on Virtual Taxation Coming Soon

njkid1 writes with an article at GameDaily that once again tackles the thorny subject of taxing virtual goods. This month Congress is going to issue its report on the subject. What's in the report isn't certain as of yet, but their decision could have an enormous impact on the future of massively multiplayer games in the United States. From the article: "Economists estimate the sale of virtual goods grosses somewhere around $30 million in the United States alone, and up to $880 million worldwide, but no one knows for sure. With this economy's growth factor averaging about 10 to 15 percent every month, it's no wonder the government wants a piece of the action. Here's the bottom line: Any service or commodity bought or sold using real-world money is taxable. Therefore, transactions where players pay real money for in-game currency or virtual items are taxable events. It doesn't matter that the items don't exist in reality, since it doesn't take much creativity to argue that the sale is attached to a service, such as the act of acquiring the currency or item. This being the case, it was never a question of WOULD the U.S. government step in with taxes, but a question of WHEN and HOW."

Comments

CA does not tax SL; neither should USA

[Randym]

Therefore, transactions where players pay real money for in-game currency or virtual items are taxable events.

First, I am not a lawyer.

Linden Lab, the company responsible for Second Life [SL] is physically located in California, therefore it seems that they would fall under that jurisdiction in taxation matters.

There are no California taxes collected on monies paid to Linden Lab, AFAIK, unless they are bundled into the cost. Neither the TOS nor the membership plan page nor the pricing plan page nor the billing policies make any reference to any included taxes.

The California Tax Service Center page says clearly that "Retail sales of tangible personal property in California are generally subject to sales tax." However, software delivered over the net is *not* taxed by CA under Reg. 1502of the California State Board of Equalization. {From LinkScan(tm)}.

State of California

BOARD OF EQUALIZATION

SALES AND USE TAX REGULATIONS

Regulation 1502. COMPUTERS, PROGRAMS, AND DATA PROCESSING.

Reference: Sections 995.2, 6006, 6007, 6010, 6010.9, 6011, 6012, 6015, and 6016, Revenue and Taxation Code.

(b) DEFINITIONS OF TERMS.

Prewritten Program - A program held or existing for general or repeated sale or lease. The term also includes a program developed for in-house use which is subsequently offered for sale or lease as a product.

(f) COMPUTER PROGRAMS.

(D) The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller's place of business, to or through the purchaser's computer and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction.

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This is certainly the case with Second Life software. The server software remains in California while the client is downloaded to your computer. This is the general business model for most MMORGs. However, not all states support this model of software taxation. This non-uniformity between states is the wedge that will be seized upon by Congress (under its interstate regulation powers (U.S. Constitution, Article I, Sec.8) to tax virtual wealth.

Of course, they *could* just as easily apply the over-the-net exemption as the state of California does. Considering how godawful-friendly they are to the business community, and how much they scream about "new taxes", you'd think that they would. Unfortunately, their second loyalty is to themselves and the "public pocketbook" (citizens, of course, are dead last), and so they are likely to grab that pie with both hands and start stuffing their faces (after assuring their corporate overlords that it is an unfortunate "necessity".)