Taxability of Bitcoin Transactions & Virtual Items

By Webb Stevens

My what is Taxable??

Who could know that one of the hottest issues in sales tax has to do with a simple song? Just when we finally got used to paying an average of 99 cents to download a song – compared to the only a few years ago when we took music off the Internet without knowing whether the download was actually legal – along comes something known as the Digital Goods and Services Tax Fairness Act of 2012.

“Digital products” are broadly construed in many formats, including:

  • digital audio files – music and ringtones,
  • digital video files – television shows or movies, and
  • digital books, delivered electronically without physical media

Even something like virtual gaming is considered with regard to regulating state sales tax – something most people never even consider as part of the digital product environment.

Did this complicate matters or did it simplify them?

Actually, the Act is all about consistent treatment of tax rules across physical and digital goods. Congress passed the Act to prevent states from taxing digital goods in a manner inconsistent with a state’s existing sales tax legal framework. Think of this as Congress’s effort to make sure digital goods aren’t taxed in a discriminatory way. This appears to be a truly preventative measure since no states currently taxing digital goods would be in violation of this law.

While sales tax on digital goods is a state-by-state decision, there are many gray areas among states as to how they define “digital goods.” However, remember that whether a state does a good job defining digital goods has little or no bearing on whether digital goods are taxable in that state. The impact of the federal law may or may not be significant. On a practical level, it remains to be seen whether this federal law will have any real bearing on sales tax of digital goods but it is certain to cause questions and confusion for many.



About the Author

Webb Stevens is senior director of Product for Avalara.

Contact him at [email protected].

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