Dedicated readers of our blog know we have been covering issues related to sales tax and digital products for years; it’s a tricky area we often help clients with.
As NFTs, or non-fungible tokens, have gained popularity worldwide, we are beginning to see sales tax questions arise about these products. As with other digital products, the details are vital to understanding your sales tax obligations.
In this article, we share why understanding specific details related to NFTs is so important for ensuring sales tax compliance.
When Are NFTs Subject To State Sales Tax?
Very few states have issued specific guidance on whether the sale of an NFT is subject to sales tax. So how do NFT sellers know if they should collect and remit sales tax in each state they have NFT sales in? First, we can look at a state’s legislation regarding digital products. Traditionally, only tangible personal property was eligible for sales tax, but when digital products gained traction, some states began to implement taxes on them. The devil is in the details, however, because the definition of a ‘digital product’ varies by state. Some states say that if a digital product is taxable in its tangible form, then it is taxable in its intangible form. Some states actually treat intangible goods as tangible personal property (TPP) because they can be seen and experienced, and some don’t tax digital products at all because they are intangible.
In states where a “digital good” is broadly defined, an NFT may fall into that category. An example of this is in Pennsylvania, where they tax “any otherwise taxable tangible personal property electronically or digitally delivered, streamed or accessed.” Recently, Pennsylvania also released direct guidance further stating that NFTs are subject to sales tax as a digital good. Another state that has issued direct guidance on NFTs and sales tax is Washington state. They published a comprehensive guide defining which NFTs are taxable and more.
Even if the states sellers have nexus in have not issued direct guidance, if they require sales tax collection for digital products, it is likely that the seller will be obligated to collect and remit sales tax for NFTs sold there. Furthermore, if NFTs are subject to sales tax in a state and sold through a third-party marketplace facilitator, and the state they are being sold in has marketplace facilitator laws, the platform may be responsible for collecting and remitting sales tax. Direct and third-party sellers don’t need to have a physical presence in the state to have nexus. As long as they meet a certain threshold of sales (the threshold amount also varies by state) in a state, they need to collect and remit sales tax.
Additional NFT Sales Tax Challenges
If that isn’t complex enough, another issue some NFT sellers may run into is that they often don’t know where their customers are located since transactions are conducted online with electronic payment in cryptocurrency. As explained in this article by Bloomberg Tax, as people become increasingly protective of their personally identifiable information, it may be hard for NFT sellers to stay above their competition if they are requesting this type of information from their customers, but it certainly makes it difficult to comply with sales tax obligations.
Need Help Figuring Out Your Multistate NFT Sales Tax Obligations?
As you can see, there are a multitude of details to keep in mind when figuring out your multistate NFT sales tax obligation; we can help you understand them to stay compliant. Working with an experienced team of state tax consultants like Miles Consulting Group is an excellent way to stay on top of your NFT sales tax requirements. If you have questions about your state sales tax obligations, please contact us today. We’re happy to clarify any NFT sales tax issues you’re trying to navigate.
