Over the last several years, Crowdfunding campaigns have become an extremely popular way for entrepreneurs to raise funds for their latest products. But many crowdfunders don’t think about how sales tax affects their projects.
An Example of Sales Tax & Crowdfunding
If you think about it, crowdfunding is essentially the advance purchase of products, since most crowdfunders offer physical items as incentive to support their project. Therefore, if the ultimate product is taxable for sales tax, then the company should be assessing sales tax on the receipts. Most companies won’t really do that though, so they will essentially pay it out of pocket instead.
Here’s an example: You pay $25 to contribute to a crowdfunded campaign for a “new widget” with the promise that ACME Co will send it to you in the next month. The new widget will be hot off the press to you and later it will sell for $50. So, ACME is unlikely to charge you $27 (assuming an 8% sales tax rate) and remit $2 to the state. They’ll either indicate that sales tax is included and round it down (the price is $23.18 plus tax, or $25 tax included), or just eat the $2 and remit it themselves.
How to Address Sales Tax in Crowdfunding Campaigns
Most states haven’t fully addressed the how to handle sales tax in crowdfunding campaigns yet, but the Washington State Department of Revenue has issued some guidance. The American Institute of CPAs shares a more in-depth review of Washington’s insight, but here’s a summary:
Nexus
To determine exactly what sales tax rates to use, it’s important to define which states have jurisdiction. Of course, with crowdfunding campaigns this gets tricky. In 1992 the U.S. Supreme Court ruled the seller has to have a physical presence in a state for the company to have “substantial nexus,” which would make them responsible for collecting that state’s sales tax on purchased goods.
Although most crowdfunders are individual people or small companies without physical presence in many states, it’s possible they could be considered to have nexus in additional states through the crowdfunding moderator, such as Kickstarter or Indiegogo. This is due to “click-through nexus” provisions currently in about 15 states, which expand jurisdiction to reach more out-of-state sellers. This means that if an out-of-state seller pays commission to an in-state entity that refers an out-of-state seller, if the referral leads to a sale and if the seller’s annual sales from referrals reach a certain threshold, then nexus may be established.
Taxability
Sales tax on the rewards for contribution to a crowdfunding campaign is dependent on what the item is. Tangible items are subject to sales tax, and in some states digital products like videos, music or books are as well. However, rewards like thank you notes or listing contributors’ names online are generally considered donations and not taxable.
Timing
Because most crowdfunding campaigns are dependent on reaching a specific funding goal, some states like Washington don’t consider a retail sale being made until the goal is met. Therefore, sales tax needs to be reported once the project is fully funded.
Other states, however, could follow a more aggressive approach method and look at it as a sale and return, which means sales tax would need to be reported at the time each contribution is made and then allow a credit if the funding goal isn’t met.
It’s also worth noting that this only address campaigns that are dependent on reaching a funding goal. For flexible funding campaigns, where the crowdfunder keeps all funds raised, even if they don’t meet the goal, it isn’t clear if the state would postpone reporting sales tax until the end of the campaign.
Last Thoughts
As you can see, from nexus and taxability to timing, there are a lot of questions that surface around sales tax and crowdfunding campaigns. Please contact us if you’d like to discuss this more! We’re happy to offer guidance and insight should you choose to pursue a crowdfunding approach to your business!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit. To learn more, contact us today at www.MilesConsultingGroup.com.
