The popularity of electronic sports continues to grow with higher prize money, bigger events, lucrative sponsorships and sports betting. Esports is a multimedia, multi-billion dollar, global industry where professional players compete in tournaments. These players have turned video game tournaments into spectator events that attract millions of fans worldwide. In 2021, more than $240 million in prizes were awarded. Many professional players earn a large portion of their income from merchandise sales.
In esports, the term merch, or emerch, refers to branded apparel, accessories, colorful toys, graphics, and digital game art. Emerch creates a real increase in revenue, bringing with it the responsibility of controlling the limits of state tax relations and the increasing complexity of income reporting. of the state. Adding to the challenge, recent changes to state income tax and corporate income tax laws further affect organizations that sell emerch across many states.
Area of Effect—The Wayfair ruled
On June 1, 2018, the United States Supreme Court issued a ruling South Dakota v. Wayfair but states may tax purchases made from out-of-state sellers even if the seller does not have a physical presence in the state. The court overturned his decision in 1992 Quill Corp. v. North Dakota which agreed that North Dakota cannot impose tax requirements on out-of-state sellers who do not have a physical presence (ie offices, stores, or employees) in the state.
Wayfair removes the physical presence requirement and allows states to impose sales and use taxes on remote sellers. A state may simply enforce nexus when a foreign emerch sells to the state. These new economic relations laws require statewide retailers to collect, report and pay sales tax on all sales including online and in-person event sales.
The high court The decision to abolish the physical presence rule has a significant impact on the income tax of gambling companies, esports teams and professional players. More than half of US states have adopted market-based sales or marketing. Emerch sellers without state connections may end up paying state taxes and fees in the states where their customers are located. In addition, emerch sales to customers in such states may create markets in such states.
Next level—Wayfair’s Tax implications of Emerch sales
AfterWayfair, most US states with sales taxes have enacted new tax-related laws that change the way sales taxes are collected and reported. States now use lower sales limits and can enforce minimum collection limits.
Each state will independently set its own thresholds or transactions creating a confusing environment for reporting income. These thresholds are relatively low, and affect smaller esports organizations, such as those with annual sales of more than $100,000, or 200, per year.
Counterattack—How to deal with a Wayfair the world
Compliance with sales and income tax laws requires knowledge of the requirements of each state in which emerch is sold or games are accessed by consumers. Although the sales tax threshold applies to annual transactions, quarterly filings are generally required in each state. This may require additional costs to change the accounting system to match the collection of business taxes by many states.
Emerch sellers need to proactively determine which states they need to establish and register with the revenue department in those states.
Additional problems are presented for gambling companies, esports teams, and professional players who try to comply with the commercial mining laws regarding income tax. Unlike traditional businesses, gaming companies don’t necessarily know where their customers are or access game servers. This leads to additional complications when evaluating market-based sourcing. A unique approach has been considered by some gambling companies; for example, some companies base their distribution on different states (and internationally) based solely on census data. Some states have informally indicated that this is a “legal” method.
These issues are necessarily complex and require an independent analysis of each client’s situation.
Special Events — Conventions and Competitions
Many esports teams and professional players travel to conventions and tournaments. The award is from where it was won in most states. Fortunately, many esports conventions are held in Nevada or other places where there is no income tax.
Similarly, emerch marketers attend conventions and contests across the country to reach their customers. Most states consider all sales to be taxable although sales rules vary for specific events. Emerch vendors must pre-register for a special event vendor license and are responsible for collecting and remitting sales tax on all sales made during the event.
Endgame—Effects of Wayfair
The rules for sales tax and income tax have changed. Game companies, esports teams and professional players need to comply with regulations in many states, many of which may not have a physical location.
Esports organizations and emerch marketers are encouraged to seek tax advisory services to address all areas of sales and use tax. Bloomberg Tax Research offers comprehensive sales tax information tables, as well as sales and use tax assessment tools. If your business has any questions related to state income tax, need help determining your nexus status, or any other area of taxation, please consult your tax advisor.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Paula Gustafson is a corporate tax specialist with the law firm Nixon Peabody, focusing on tax litigation, corporate governance, compliance related to mergers and acquisitions, and new technology emerging, including digital platforms, mobile applications, and online game development. He has in-house experience in game development and is an avid online gamer.
Shahzad Malik co-leads Nixon Peabody’s tax practice, focusing on tax issues in mergers, acquisitions, and capital transactions, as well as tax litigation. He has represented gaming, digital media, and blockchain companies in transactions and acquisitions.
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