Businesses that sell video games and related content online and by remote access have been pondering an essential sales and use taxability question: What is the proper characterization of the goods and services being sold? Although downloaded video games have long been thought to be a form of prewritten computer software, businesses that sell related subscription services, virtual goods, and virtual currencies have enjoyed much less tax certainty.

Two states have weighed in on this issue in recent months. Kansas and Missouri issued letter rulings addressing the tax issues that arise in the gaming environment. Although the states’ guidance is not entirely consistent, gaming companies may welcome any move toward improved tax clarity in the virtual gaming business.

The facts and issues presented in each ruling were very similar. Each taxpayer requested a ruling on the taxability of a variety of gaming goods and services: 

  • Remote access software and virtual goods, where the purchaser receives access codes on a printed receipt that allows the customer to access content on a third-party server over the Internet;
  • Downloadable digital content where the purchaser receives access codes on a printed receipt that allows download of prewritten software that provides content such as new game levels, virtual equipment, and characters for enhanced gaming experience;
  • Subscription cards that provide access to online gaming networks, interaction with other players, and access to digital content by either remote access or download;
  • “Points cards” that contain points values that can be used within the online gaming environment for online game play, interaction with other players, and access to digital content by either remote access or download; and

  • “Notional dollar value cards” that contain dollar values to be used for the same purpose as the points cards.

Remote Access or Download?

The Kansas Department of Revenue (the Department) reached some interesting conclusions in Kansas Private Letter Ruling P-2011-004 (June 16, 2011). In Kansas, downloaded prewritten computer software is subject to tax, but remote access software is not. Thus, the Department found that remote access to the gaming software and virtual goods is not subject to tax, but the same content downloaded should be treated as downloaded prewritten software.

Missouri reached a similar but varied conclusion in Missouri Private Letter Ruling No. LR 6866 (August 18, 2011), based on its different treatment of prewritten computer software. In Missouri, only software delivered on tangible media is subject to tax. Thus, the Missouri Department of Revenue, like Kansas, found that the remote access to software and virtual content was not taxable. Unlike Kansas, Missouri approached taxation of downloaded content by looking back at the original gaming software purchase to determine taxability of the downloaded content. Missouri concluded that the determinant in whether the downloaded gaming content is taxable is the method of delivery of the base gaming software. In other words, the vendor must know at the time of the sale of downloaded content whether the original game was purchased on tangible medium or by download. In an industry rapidly moving toward third-party developers and vendors selling virtual content to gamers on a variety of gaming platforms, the need to know the original delivery method will likely prove impossible.  

Pick a Card!

The treatment of subscription cards, points or virtual currency cards, and notional dollar cards has prompted a good deal of discussion in the virtual gaming industry. As many gaming platforms move toward their own proprietary virtual currency, the tax treatment of the sale of those currencies has prompted much speculation, but until now, states have offered little guidance.      

Kansas takes the position that the sale of cards is subject to tax at the card’s point of sale because the card may be used for downloaded content, which is taxable in Kansas. At the same time, the Kansas Department determined that the notional dollar value cards are not taxable at point of sale, but rather should be treated as a “gift certificate” and taxed at the point of redemption as a cash equivalent.

Missouri, however, found no difference in treatment among subscription cards, points cards, and notional value cards. In all cases, Missouri imposes tax when the cards are redeemed, not when sold. 

Businesses operating in the virtual gaming industry are currently operating without sufficient state guidance to determine their tax obligations.