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Crowdfunding And State Taxation

posted Dec 30, 2014, 11:45 PM by J Shaw   [ updated Dec 30, 2014, 11:45 PM ]
Online crowdfunding has turned into a mainstream concept. It has enabled people to raise millions of dollars to start businesses or fund projects. For business entrepreneurs, it is a revolutionary solution to a big problem. That is, they need money, but private equity and venture capital firms won’t take the risk on a company that has only $1 million or so in sales.

There are a host of crowdfunding companies. From a simple Internet search, I found a lot. Kickstarter may be the most well known, but it has been joined by Indiegogo, RocketHub, Crowdfunder, Crowdrise, and many others.

Crowdfunding companies have long been concerned about potential regulation by the federal government. They now have a new concern: State departments of revenue that are slowly starting to develop their own rules.

The Washington Department of Revenue recently issued guidance on the taxation of crowdfunding that may concern project creators. To start, project creators that raise more than $12,000 from crowdfunding must register with the DOR. That means the project creator must obtain a license and file all appropriate tax returns. In addition, the project creator must report donations on an excise tax return in the reporting period when the project is fully funded.

Project creators are also required to collect sales tax on donations if they provide a reward. A reward includes retail services, digital products, or tangible personal property, but it does not include items otherwise exempt from sales tax. However, if the reward is delivered to a backer that is located outside Washington, it is not subject to Washington sales tax.

There are business and occupation (B&O) tax requirements as well. A project creator’s B&O tax classification is based on the rewards it gives to backers, and tax must be determined for each donation. The B&O tax can be complicated. In general, as the DOR explains, amounts received for items with no significant value or those received as donations are not subject to B&O tax. Amounts received for the provision of tangible personal property tax, digital products, and retail and non-retail services may be subject to B&O tax, depending on their classification.

The real message is that states are considering how to tax crowdfunding — and that it won’t take much to trigger tax consequences. The Washington DOR uses the example of a book author who wants to turn one of his books into a movie and uses crowdfunding to raise money for the project. A donation of as little as $25, in return for which the book author gives a signed copy of the book, is sufficient to trigger B&O tax.

Compliance with individual state laws could be complicated for those using crowdfunding. This is an area that deserves watching in the coming year as more states join in to create guidance on when state taxes apply to crowdfunding efforts.

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