The recent worldwide phenomenon of Pokémon Go raises some interesting questions regarding state taxation. The app itself is free, however there are premium features that cost the user money and thus create revenue for the Company who developed it. Niantic, Inc., who collaborated with Nintendo to develop Pokémon Go, also generates revenue from corporate sponsorships. This is similar to “product placement” in movies and television shows, a form of advertising revenue for the Company. This advertising revenue, along with the direct digital revenue generated from the purchase of premium features within the game, results in roughly $1.5M of revenue per day for Niantic. This article will focus on the digital revenue and its potential state tax impact.
There are many state tax questions that arise from this type of mobile app. Are the purchases of premium in-app features taxable from a state perspective? Well, this is very complicated and varies from state-to-state. First off, the customer pays to purchase Pokécoins that can be used to purchase premium features within the game. From a sales tax perspective, no sales tax is collected on the purchase of Pokécoins, which essentially is a transfer of currency. Generally, a company would be required to collect sales tax in states in which it has a physical presence. Presumably, Niantic doesn’t have any presence outside of California, its state of commercial domicile. Under California state law, sales of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images are generally excluded from sales tax. Note, this doesn’t preclude the customer to remit use tax for such transactions.
Finally, where should the sales of in-app features be sourced? This is relevant for both sales taxes and income taxes. Most states source sales based on where the benefit is received. In this case where is the customer playing the game. However, this is very difficult to determine because many customers may travel between states on a routine basis. So would you source the sales based on the customer’s home address or billing address? As you can see there is a high degree of uncertainty from a state tax perspective, primarily because state tax regulations lag behind the dynamic products/services offered by High-Tech Companies.
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