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ONLINE SALES TAX IN THE USA

Learning the ins and outs of sales tax in the United States is challenging. It means understanding how to collect and remit within a complicated body of over 10,000 sales tax laws — a staggering figure that reflects the complexity of this state-by-state tax structure. On top of that, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018) further complicates the digital sale of video games.

Feeling overwhelmed? Don’t.

There are options for you to offload the hard work of tax management in the U.S., as well as information within this post designed to catch you up to speed on three different ways to stay compliant.

Though Xsolla can’t offer specific legal advice, you can think of this post as a great introduction for what any video game developer needs to know when selling video games digitally in the U.S., specifically by answering the following questions:

  • What is a sales tax?
  • Why has sales tax law changed?
  • Where does it affect you?
  • How can you stay compliant?

Please note that this blog post is for informational purposes only, and does not constitute professional legal advice. Please consult independent legal advice for information specific to your circumstance.

WHAT IS A SALES TAX?

A sales tax is a consumption tax imposed by the government on the sale of goods and services. There is no federal sales tax in the U.S., which means state governments legislate, enact, and enforce their own sales tax laws. This causes a great deal of variability between the rates of sales taxes, which not only fluctuate between states — e.g., Colorado at 2.9% and California at 6.0% — but also may compound with the sales tax rates of municipal governments (cities and counties).

If you live outside the U.S., then you want to know how this differs from a more familiar consumption tax, the value-added tax (VAT). While a VAT structure charges a percentage of the value added at every stage of the supply chain for a good or service — from production to point of sale — a sales tax charges end users a percentage only at the point of sale, and requires businesses to collect and pass on that recorded tax to a state government. Meaning, if you plan on selling video games in the U.S., expect to take on a different set of administrative responsibilities.  

SOUTH DAKOTA V. WAYFAIR, INC.
LETS STATES REFORM THEIR SALES TAX LAWS

Before the U.S. Supreme Court ruled in favor of South Dakota on June 21, 2018, state governments made sales tax laws based on a physical presence standard. This standard only allowed a state government to collect and remit sales tax on remote (out-of-state and out-of-country) sellers if that seller had a physical nexus — such as a store, warehouse, employee, or representative — in that state.

While this proved beneficial for many retailers — especially as e-commerce emerged and grew in the wake of the Internet — state governments missed valuable opportunities to tax digital purchases, losing more than $13 billion in sales taxes in 2017 alone.

But, as a business on the Internet took off, so too did web cookies, digital advertisements, and easier means of capturing an end user’s tax information. These new technological advancements chipped away at the foundation of the physical presence standard and made it clear that sales tax now existed in the digital age.

So, the U.S. Supreme Court overturned the physical presence standard with its decision in South Dakota v. Wayfair, Inc. and established an economic presence standard. This new standard allows a state government to pass legislation that imposes a sales tax on remote sellers under some or all of the following criteria (depending on the state).

  • Physical presence
  • Representational, attributional, or click-through presence

    In this case, a representational, attributional, or click-through presence lets state governments collect and remit sales taxes on purchases made as a result of referrals from in-state affiliates (e.g., influencers located in Washington generate more than $10,000 in sales for your video game, so you have to pay sales tax in Washington)

  • Predetermined amount of sales

    e.g., $100,000 or more in Washington; $250,000 or more in Alabama; $300,000 or more in New York; $500,000 or more in Massachusetts

  • Predetermined amount of transactions

    e.g., 100 or more in Massachusetts; 200 or more in Washington

The following states (and Washington, D.C.) will generally subject online sales of digital video games to sales tax:

Alabama
Arizona
Connecticut
D.C.
Hawaii
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maine
Massachusetts
Michigan
Minnesota
Mississippi
Nebraska
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Pennsylvania
Rhode Island
South Dakota
Tennessee
Texas
Utah
Vermont
Washington
West Virginia
Wisconsin
Wyoming

 

 

THREE WAYS TO STAY COMPLIANT

Although there are thousands of sales tax laws on the book — with many changing monthly and more being added — there are several different ways you can remain compliant while selling video games digitally in the U.S.

STATE-PROVIDED SOFTWARE

For starters, states like South Dakota have legislation that “provides sellers access to sales tax administration software paid for by the State.” You can use the free, state-supplied software when managing sales tax in that state and become immune to audit liability, ensuring total compliance with the latest sales tax laws of that state. But, not all states have passed legislation that provides free software for businesses, so this method leaves you open to sales tax liability elsewhere.

DIY SOFTWARE

Video game developers can also track the different sales tax laws across the United States and design their administration software to be compliant with every state’s unique standards. This doesn’t involve a third party but requires resources that you may not have. Moreover, this also leads to risk, wherein you can receive fines for reporting incorrect numbers, as well as not filing with certain state governments even if you had not collected any sales tax in that state for a given year.

MERCHANT OF RECORD

Lastly, you could offload the complexity of managing taxes to a trusted merchant of record like Xsolla, which handles all tax- and compliance-related work for you. From Ubisoft to Valve to Twitch and more, over a thousand video game developers and businesses already leverage Xsolla’s expertise to comply with local sales tax laws and regulations across the United States — no matter the payment system used.

BUSINESSES THAT COMPLY, SUCCEED

While staying compliant with a multiplicity of U.S. sales tax laws isn’t easy — nor anywhere as exciting as making video games — it’s crucial to your success. As additional state governments look to pass legislation that takes advantage of the economic presence standard, it’s now more important than ever to understand where and how you may be obligated to pay sales tax.

So, no matter if you’re indie or enterprise, take the time today to assess how these changes to sales tax precedence and legislation affect your ability to sell video games online in the U.S.   

Stay compliant by offloading sales tax management to Xsolla Payments. CONTACT US NOW.