SALTy Tax Alert: Clarity is Coming for Sales Tax on Non-Fungible Tokens
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SALTy Tax Alert: Issue No. 2022-22
Clarity is Coming for Sales Tax on Non-Fungible Tokens
Summary
Crypto exchanges, retailers and NFT-focused marketplaces should be aware of potential sales tax applicability to the sale of Non-Fungible Tokens (“NFTs”). States are only now beginning to catch up to the technology and taxation of NFTs and the evolution of multistate sales taxation of NFTs is expected to accelerate rapidly. Artists, retailers and marketplaces: let us offer clarity and strategy for your compliance plan.??
In Detail
What is an NFT?
What is a non-fungible token? Is it an intangible that resides on the blockchain? Is it a Digital Good? Is it merely a representation of the underlying asset?
The answer from a sales tax perspective is maybe all the above.
NFTs are a unique unit of data that can be stored and tracked on a blockchain and bought and sold. “Non-fungible” means that it’s unique (Bitcoin is fungible – one Bitcoin can be traded for another).
NFTs are unique digital assets that often represent a real-world object such as digital artwork, in-game items, music, videos, trading cards and other collectibles. NFTs can also represent intangibles such as a right to royalty streams or anything else the minter of the NFT can imagine is valued by a potential buyer.
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How might states tax NFTs?
Application of sales tax to NFTs has not been specifically addressed in most states (although approximately 31 states subject “digital products” to sales tax).?Puerto Rico is drafting regulations that would include NFTs in their definition of taxable digital goods.
Pennsylvania was the first state to release specific written guidance on NFTs in their May 2022 “Retailer’s Information,” which included NFTs as a taxable digital product. However, the publication provided no further explanation or definitions beyond including NFTs on a list of taxable digital goods.
Washington State also issued an interim statement regarding the taxability of NFTs. They indicated that NFTs will be taxed based on the character of any underlying products included in the sale and provided Sales/Use and B&O Tax taxability based on four basic types of arrangements.?
Maryland recently expanded their definition of taxable digital products, effective July 1, 2022. Maryland’s definition of taxable digital products seems broad enough to include NFTs but does not mention them specifically.
The following are fact-specific questions that states have not directly addressed related to NFTs:?
Insights
In NFT’s short history, the sales tax punditry has opined that NFTs are intangibles on the blockchain and, as such, are not subject to sales tax. Arguably, the “underlying asset” which the NFT represents (digital art, intellectual property, right to future royalty streams, membership, or special event access, etc.) would be the driver of sales tax applicability; however, that position could be quickly disrupted as states and global taxation authorities work to issue new guidance and legislation.
Over the years, states have been slow to react to changing technology and how products are sold, as they relate to sales tax. While a few states have addressed the taxability of NFTs, NFT sales volumes have been significant and could drive states to address the NFT sales tax issues sooner, rather than later.?As a seller or buyer of NFTs you should consider options when transacting business in states that tax digital goods and determine if your NFTs could fall into the state’s definition.
We are monitoring this topic as the landscape for digital products is changing.?Armanino LLP is ready to assist with determining applicability, registration and/or filing, and potential additional nexus liability concerns.?
For additional information, please contact Lance Warren or Bernie Ottenlips.