Sales Tax: What Indie Game Developers Need to Know
Tags: gamedev, payproglobal, tax, indiegame
Published: 2022-05-16 15:36:54

Game development creates alternate worlds, characters, and ultimately a highly entertaining shared experience. But it’s also a business, and businesses need sales and growth to survive. Managing your business transactions requires a particular set of skills, one of which is understanding a significant source of earnings for governments worldwide: taxes.

Sales tax can be extremely difficult to navigate, especially if you’re a growing and expanding business focused on selling digital goods and services such as games.

In 2020, the already flourishing gaming industry grew 12% from $120.1 billion to $139.9 billion. That’s a number that is so big it is hard to wrap your brain around it. Furthermore, as online video gaming continues to explode in popularity, so too does the complexity surrounding the tax obligations on these services.

Countries worldwide are quickly learning how to make digital services subject to tax and leverage the industry growth to their advantage, increasing their income. In the U.S., individual states are also starting to realize there is good revenue to be made from the online gaming industry and have the ability to put into place new tax laws benefiting their local jurisdictions.

Are you wondering if your business complies with all the different tax issues worldwide? We are here to help by providing you with this sales tax for game devs’ article.

![Sales Tax for Indie Game Developers](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/viot4ujnklnn3nhvnvwe.png)

## What Is Sales Tax?

Sales tax is collected by a retailer from its customers or users whenever a transaction is made. Subsequently, the retailer is required to remit this money to the relevant tax authorities, according to the laws of that jurisdiction.

As a game developer and the sole proprietor of the good, you may need to charge sales tax in certain jurisdictions where customers have paid for your product or streaming services. When it comes to digital products, it applies in many U.S. states and other foreign jurisdictions. There are so many different tax rates and new laws in various countries and states and sometimes differ even by zip code. No matter how complicated tax management is, you will have to focus on following the correct steps to avoid having to deal with the IRS.

## 2 Tax Complexities for Game Devs

### Digital Products and Tax

Tax was rarely applied to digital services and products in the past, as many states had no laws or regulations controlling this category. The reason is that many of the laws around sales taxes were conceived before digital goods existed and certainly before they were such an essential part of mainstream life, not to mention a source of income. Some tax regulations were created with “mail-order” companies in mind, but this did not take into consideration the booming world of eCommerce. However, the landscape is catching up and steadily changing to keep pace with today’s digital world.

So how are “_digital goods_” defined? This term usually refers to:

- Digital audio files such as music and podcasts
- eBooks
- Virtual magazines and newspapers
- Digital images and video files like photographs, television shows, and films
- Software, including streaming services
- Online video games & mobile games
- Indie games fall into the sixth category.

These products often don’t fit nicely into state sales tax definitions and laws. It applies typically to “tangible physical property,” but an online, streamed video game cannot be held in one’s hands. Some states try to apply the tangible physical property tax rule to online games, as they can be seen if not touched. Others don’t charge tax on them at all as they’re considered intangible. Alternatively, some states use the same rules for all types of products. Most confusingly for gaming business owners, some states offer no definitions, guidance, or regulations for the taxation of non-tangible products. This costs video game companies in different industries various resources, specifically of a financial nature. Indeed, we’re talking about lost income.

The taxation of non-tangible products is also subject to regular change as states attempt to understand all the definitions and changing taxation needs. To cut down some of the confusion, entrepreneurs can easily find plenty of resources, including helpful articles containing complete lists of states that expect the payment of the sale and use of software and those that don’t.

###Defining the Source of Video Game Purchases for Tax Purposes

Generally speaking, determining whether or not to tax a transaction, how much to tax, and when to acquire and remit tax depends on where the customer paid for the product or service. This is considered the source of the sale. Usually, the location of the purchase or the buyer’s address determines whether a taxable income is applicable.

With virtual products, especially gaming, the source of the sale can be hard to define. And as a result, so is the taxable income. A perfect illustration of this is when a game is purchased by other gamers with virtual money because it will contain no location information from the customer. Another scenario is when a customer’s home might be in one state, but they’re travelling and making payments from another state or even a different country.

It’s become painfully obvious that these complications within the existing tax treaties and regulations can make compliance more challenging than ever. The U.S. Government passed the Digital Goods and Fairness Act of 2019 to resolve some of these issues. Under this act, states must use a customer’s address to apply taxes. It also seeks to implement fair taxes on payments for digital goods or services with similar rates to tangible products. Texas was the first state to issue a specific ruling on tax sourcing on digital goods and services. Private Letter Ruling №2017010107 states that a “taxpayer may use the Registration IP address associated with a physical address in Texas in place of the purchaser’s business or residential address.”

Find out [where and when your business has to pay sales tax ](https://blog.payproglobal.com/sales-tax-for-indie-game-developers)and [5 steps on how to manage your business’ sales tax](https://blog.payproglobal.com/sales-tax-for-indie-game-developers) on _[PayPro Global’s Blog](https://blog.payproglobal.com/)._