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How Should States Tax NFT Sales?

On July 1, 2022, the Washington State Department of Revenue released an interim statement on how sales tax will apply to non-fungible tokens (NFTs). Washington State is one of the few states to address taxability of NFTs and is beginning to stand out as a leader in this space.

It’s mostly uncharted territory.

What is an NFT?

NFT was born from a decentralized blockchain.A peer-to-peer network on the Internet. Blockchain emerged in October 2008 during the Great Recession when confidence in traditional financial processes was shaken. Bitcoin, a virtual currency that represents “the first application of blockchain technology,” was introduced in 2009.

The first topic addressed by the Washington State Revenue Department (DOR) Interim statement Provides what is called the term “functional description” irreplaceable, tokenWhen Non-fungible tokenThese terms and the technology they represent are very new and do not yet have codified definitions by the states.

According to DOR:

Non-substitutable Irreversible cannot be copied, subdivided, or replaced, as it is meant to be irreplaceable. In contrast, “fungible” things are commodities, money, or other things. teeth Redeemable in equal parts for payment to settle a debt or account.

a token It is a digital unit supported by the blockchain.

A Non-fungible token A unique digital identifier that cannot be copied, subdivided, or replaced. It is recorded on the blockchain and used to prove credibility and ownership. NFT No Alternative cryptocurrencies; Similarly, cryptocurrencies are not NFTs.

NFTs are sometimes bought and sold as stand-alone items for lack of a better term. Alternatively, the sale of NFTs allows the purchaser to receive products or services that:

  • Digital products (artwork, music, video games, or video works)
  • Entrance fees to events (tickets for concerts, clubs and sporting events)
  • Food and drink prepared in restaurants and clubs
  • Tangible personal property (clothes, collectibles)

For example, there is a company that sells NFT Golf Club and Country Club Membership To allow for more partial usage and heritability.a New York Private Dining Club Sell ​​your membership through NFT. And in the fashion world, NFTs are increasingly linked to physical items.

It’s worth emphasizing that the provisional statement functionally describes NFTs as digital codes. Most states have not yet done so, and the taxability of NFTs remains questionable. David Lingerfelt, senior director of North American tax content at Avalara, wants states to clearly define NFTs, much like Washington is doing now. “Otherwise, you open up costly and time-consuming tax controversies,” he says.

Are NFT sales subject to sales tax?

There is no single answer to this question, as taxability depends on several factors, including what is included in the transaction, the taxability of each component, and the identity of the buyer and seller.

DOR identifies four basic types of NFT transactions and provides sales tax guidance.

  • 1. Purchases are for stand-alone digital products (the NFT itself) such as artwork, signs, and video clips. Sales tax is typically applied to retail sales of digital products in Washington state, so sales of his NFTs stand-alone are taxable.
    • a. Retail and occupational (B & O) taxes also apply.
  • 2. The purchase target is not the NFT itself, but a stand-alone product or service. This transaction is usually taxable because retail sales of goods or services are usually subject to Washington sales tax.
    • a. Retail trade and occupational (B&O) taxes also apply.
  • 3. Purchases are for stand-alone products or services that are not classified as retail, not the NFT itself. Sales tax in Washington generally does not apply to sales of goods or services that are not defined as retail sales, so transactions are not taxed.
    • a. B & O tax, usage tax, or other excise tax may apply.
  • 4. The sale of the NFT includes the payment of the royalty to the creator of the NFT or another party who retails the royalty right for future sale or distribution of the NFT. Loyalty payments are not subject to Washington sales tax.
    • a. Loyalty B & O tax applies to total revenue from royalties.

How to Tax Bundle Transactions Containing NFTs

While some people will definitely be happy with standalone NFT purchases, the DOR expects many NFT sales to be mixed or bundled deals. And determining the taxability of any kind of bundled transaction is like untying the knot. You have to follow different threads to get to the end.

First, the seller must determine whether the sale is in fact a bundle transaction (i.e., a retail sale of two or more products, where the products are otherwise distinct and identifiable, and where the products are are sold at one itemized price). ).

Next, the seller must determine whether sales tax applies to each item or service included in the sale. Bundled transactions are typically subject to both Washington sales tax and retail B & O tax, with the exception of that rule.

How do you raise NFT sales?

To determine the sales tax rate applicable to your NFT sale, you need to know how the sale was procured. The Destination Procurement Rule imposes sales tax based on where the consumer owns goods or benefits from services. The sourcing rules of origin impose sales tax based on where the sale takes place (i.e. the location of the seller). Destination and departure sourcing details.

Raising the sale of tangible personal assets can be difficult, but there is nothing to raise the sale of digital products like NFTs.As a member of Streamlined sales tax (SST), Washington is obliged to follow the SST procurement hierarchy. However, SST has not yet specified how to procure NFTs, and until that is possible, SST member countries like Washington are unique. “In the past, if another SST member state developed another policy, the first state would have to return to its position, and as an arbitrator, the SST said that the position of the other state was more accurate. I’ve decided, “when SST takes office,” said Scott Peterson, Avalara’s Vice President of Government Affairs and the first Executive Director of the SST Board of Directors.

For now, Washington has applied SST procurement rules for digital products to NFTs.

  1. Origin sourcing is used when a buyer receives a digital product at the seller’s place of business.
  2. Destination procurement is used when the receipt is not made at the seller’s location.
  3. If not 1 or 2, the sale will be sent from the Seller’s business records to the Buyer’s address.
  4. If not 1-3, the sale will be delivered to the location indicated by the buyer’s address “obtained during the completion of the sale, including the address of the buyer’s primary means of payment”.
  5. If not 1-4, or if Seller does not have sufficient information to apply any of these provisions, then the location shall be the address to which Seller was originally able to send the Digital Code, or where the Digital Code was automatically Determined by the submitted address. Services (or other services that are retail sales) were provided. This means that origin procurement is used.

Due to the invisible nature of digital products, all options must be explained. Sellers do not require physical addresses to complete sales and deliveries, so addresses may not be available.

“You need at least a five-digit zip code to properly source sales to the state, which is often all you need for a credit card,” Peterson explains. “As a result, credit card rules determine how retailers collect local sales tax. It’s not an ideal situation.”

Washington Interim Statement on Taxation of Non-Fungible Tokens It’s a good read. This department clearly identifies the relevant issues and provides excellent examples for realizing each scenario. Companies are encouraged to contact the department for guidance if the facts and circumstances of their business activities are not addressed in the statement.

Pennsylvania and Puerto Rico are also working to clarify how sales taxes apply to NFTs. February 2022, Puerto Rico Department of Finance proposed adding NFTs to the list of taxable digital products.A few months later, the Pennsylvania Department of Revenue updated Rev-717 Specifies that non-fungible tokens are taxable.of Multistate Tax Commission And that Streamlined consumption tax administration board We are also working to determine how to best classify NFTs for sales tax purposes.

To date, Washington’s guidance is the most robust. Sales of NFTs listed as taxable in interim reports are presumed to be taxable as of July 1, 2022.

For more information on the mysterious properties of NFTs and the Metaverse, see below.
Taxing the Metaverse: The Basics
Selling goods in virtual worlds may affect real taxes
Are there sales tax holidays in the metaverse?

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