ONLINE SALES TAX IN THE US — WHAT YOU NEED TO KNOW
November 17, 2020

To properly collect and remit sales tax in the US, you’d need to be familiar with over 10,000 individual tax laws, plus understand the ways in which the US Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018) has allowed states to charge taxes on out-of-state vendors. It’s a lot to navigate alone, especially if you want to grow your video game business successfully.

In this article, we’ll cover online sales tax in the US and share what successful video game developers and publishers need to know when selling games online in the US market, including:

  • What is a sales tax?
  • Why has US sales tax law changed?
  • Three ways to stay tax-compliant

Note: This guide is only for informational purposes and does not constitute professional legal advice. Please consult independent legal counsel for information specific to your circumstances.

What is a sales tax?

A sales tax is a consumption tax levied by a government on the sale of goods and services. Because there’s no federal sales tax in the US, state and municipal (city and county) governments can legislate, enact, and enforce their own sales tax laws, each of which can vary and compound to create a high degree of variability from purchase to purchase. It’s structured differently from a value-added tax (VAT) in that a VAT charges a percentage of the value added at every stage of the supply chain, while a sales tax charges a percentage at the point of sale.

Why has US sales tax law changed?

Before 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 in that state, such as a store, warehouse, employee, or representative.

But in their decision in South Dakota v. Wayfair Inc., the US Supreme Court overturned the physical presence standard and established an economic presence standard. This 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
    • Lets state governments collect and remit sales taxes on purchases made as a result of referrals from in-state affiliates (e.g. when influencers in Washington generate more than $10,000 in sales for your video game, you have to pay Washington sales tax)
  • Predetermined total value 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 total volume of transactions (e.g. 100 or more in Massachusetts, 200 or more in Washington)

The economic presence standard quickly caught on, with more than half of the states in the US following South Dakota’s lead by introducing a sales tax for digital goods and/or services.

Three ways to stay compliant

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

State-provided software

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 offer this, leaving you tax-liable elsewhere.

DIY software

Video game developers can also track all of the different sales tax laws across the US and design their administration software to be compliant with every state’s unique standards. But this method can lead to risk, such as fines for reporting incorrect numbers or not filing with certain state governments even if you didn’t collect any sales tax in that state for a given year.

Merchant of record

Lastly, you could off-load the complexity of managing taxes to a trusted merchant of record like Xsolla. From Ubisoft to Valve to Twitch and more, over a thousand video game developers and businesses already leverage Xsolla’s expertise to comply with every municipal and state sales tax laws and regulation throughout the US.

Next steps

While staying compliant with a multiplicity of US 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 invokes the economic presence standard, it’s more important than ever to understand where and how you may be obligated to pay sales tax.

Whether you’re an indie studio or an enterprise operation, take time to assess how US sales tax legislation affects your ability to sell video games online in this highly important gaming market.

If you’re not an Xsolla partner, contact us at business@xsolla.com to learn about how we can help you manage the complexity of online sales tax in the US and much, much more.

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