Let’s say you’re Ralph, and you create a series of Non-Fungible Tokens (NFTs). You begin selling these NFTs, and each sells for the equivalent of $100,000. Of course, that income is subject to income tax (it’s an accession to wealth, and clearly income to Ralph). Is it subject to sales tax?
Some states’ sales taxes cover digital (electronic) items; other states’ sales taxes do not. There are even some states, such as Oregon, that do not have sales tax and other states, such as Florida, that exempt sales of digital items from sales tax. But let’s say Ralph resides in Pennsylvania and he sells an NFT to Linda; she also resides in Pennsylvania. Let’s further assume that Ralph is in the business of selling NFTs. Does he (a) need to register with Pennsylvania as a retailer for sales tax purposes, and (b) does he need to collect sales tax?
The answer is yes, he does. The Pennsylvania Department of Revenue released a new sales tax booklet that addressed this issue. Under Pennsylvania law, “…[S]ales and use tax applies to any transfer of a digital product where the purchaser pays a consideration, unless that transfer is otherwise exempt.” NFTs are specifically noted as taxable. That means that Ralph must register as a retailer and collect and remit sales tax. This income is, because Ralph is in business, also subject to local Earned Income Tax.
Let’s change the facts slightly. Ralph resides in Oregon, a state without sales tax, and sells an NFT to Linda, a Pennsylvania resident. Believe it or not, Ralph may still have to register for sales tax in Pennsylvania. Under the Wayfair Supreme Court decision, out-of-state sellers are, in some circumstances, required to register for sales tax in other states (if they meet minimum threshold requirements). Let’s further assume that Ralph doesn’t meet that threshold. In that case, Linda owes use tax (the equivalent of sales tax when sales tax isn’t charged) to Pennsylvania and must include it on her individual tax return.
Pennsylvania isn’t alone in releasing guidance. Washington state released interim guidance noting that NFTs would be subject to both sales tax and the state’s Business & Occupations Tax. I strongly suspect NFTs are subject to sales tax in other states, too.
If you’re selling or purchasing NFTs, or you are a company facilitating the sales of NFTs, you should speak with your tax professional regarding handling sales and use tax issues.
Tags: NFTs