Taxing the Virtual World . . .And Beyond


Second Life, Facebook, Groupon, and the exploding world of digitally provided content and services have thrown a wrench into tax practitioners’ ability to answer some basic tax questions. These business models (and models that are still incubating in the college brains of the start-up founders of tomorrow), have strained historical tax rules beyond their tensile strength. To those responsible for tax compliance in the virtual world, we wish you luck and, as 1970s as it may sound, may the force be with you.

This article provides a high-level overview of the state tax issues that arise within the virtual world — from avatars to apps, from coupons of sorts to digital marketplaces, from in-game pizza delivered to your real-life door to videos delivered on handheld devices and beyond. These new business models call into question traditional notions of when and where income should be taxed; raise doubts about the application of sales tax rules to modern transactions that may involve multiple parties and locations; highlight issues regarding the taxation of virtual currency exchanged for tangible or virtual goods or services; and pique the interest of unclaimed property administrators who knew what property was before the digital age.We explore a few of the virtual world’s more interesting business models and discuss their tax issues below.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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