So you crowdfunded to make a new board game or short film or open up your new taco truck. Do you have to charge your crowdfunding backers sales tax? How does that work exactly?
States are starting to solidify their guidance around crowdfunding and sales tax. Let’s dig in.
Crowdfunding 101
Crowdfunding is when a person or business raises money, generally through an internet platform like Kickstarter or GoFundMe in order to accomplish a goal.
There are three entities involved in crowdfunding:
- The host – Such as Indiegogo or GoFundMe
- The crowdfunder – The person or entity raising the money
- The backers – The people who contribute to the fundraiser
In most cases where the crowdfunder is raising money for something fun, such as to make a board game or fund the production of a film, they provide rewards to backers. Most of the time these rewards are based on the amount donated. Someone who can only donate $10 might get a quick thank you social media, while someone who donates a good deal of money might get a substantial reward. In most cases, if a physical item is being created using the funds generated from crowdfunding, that item (a book, a board game, a video game, a children’s toy, etc.) is one of the rewards for backers at a certain level.
Other types of crowdfunding, such as helping a family with medical debt or in an emergency, don’t include rewards.
Crowdfunders generally need to report their earnings as income for income tax purposes. But what they might not understand is that if they provide a reward that is also subject to sales tax, they may be required to collect sales tax from the backers and remit it to the state.
Quick note: This post is about rewards-based crowdfunding, where the person raising money offers an item, such as a video thank-you or a t-shirt, as a reward. This post does not go into equity-based crowdfunding as laid out in the 2012 JOBS act where qualified investors contribute small amounts in exchange for equity in a business or other project.
Why do crowdfunders need to understand sales tax?
Anyone who has sales tax nexus in a state, even if they are not an incorporated business, and sells taxable goods in a state is required to collect sales tax from buyers in that state.
Let’s break that down.
Sales tax nexus is a fancy Latin way of saying a “significant connection to a state.” For example, you always have sales tax nexus in the state where you live and work, because you are physically present there. Other things such as having a business partner, employee, contractor, sales person, inventory in a warehouse or making sales at a tradeshow or craft fair create nexus.
Most tangible items are taxable items. That includes things you can see and touch, such as a toothbrush or a couch. Most of the time services or non-tangibles, such as a bookkeeping service or a digital subscription to a magazine, are not taxable. However, over the past decade or so, some states have started requiring sales tax even on services and intangible items, such as e-books or downloaded movies.
Economic Nexus
A fairly new form of nexus is “economic nexus.” This is where someone makes a substantial amount of sales in a state. The amount of sales is generally a dollar amount, such as more than $100,000 or a number of transactions, such as more than 200 individual transactions. (Some states require both a certain dollar figure and number of transactions.) Either way, if you exceed a state’s economic nexus threshold, then you have economic nexus in that state and are likely required to collect sales tax from buyers in that state, including on crowdfunding rewards.
You can see each US state’s economic nexus requirements here.
Some common scenarios where a crowdfunder might have sales tax nexus:
You live in Connecticut and are developing a board game with your partner who lives in Washington state. If the two of you crowdfund, you’d have nexus in both Connecticut and Washington state because one of you is based on each of those states.
You live in Virginia but store the t-shirts you are giving away to your crowdfunding backers in a warehouse near the Kentucky UPS hub for faster shipping. T-shirts are taxable in both Virginia and Kentucky, so you’d have nexus in both those states.
You live in Georgia and one of your crowdfunding rewards at the $50 level is a plush octopus. You are very popular and 245 Georgia-based backers give you $50 and thus earn the plush octopus. Because you exceeded Georgia’s economic nexus threshold of $100,000 in sales OR 200 transactions, and because plush toys are taxable in Georgia, you’d be required to collect sales tax on backers in Georgia on transactions that include the fuzzy octopus as a reward.
How can crowdfunders handle sales tax?
One way is simply to avoid having to charge sales tax. Don’t hand out rewards that are subject to sales tax in a state where you have sales tax nexus. Many crowdfunders get around having to register for a sales tax permit and collect sales tax by handing out digital rewards, such as downloadable information products or personalized thank you videos. But keep in mind that more and more states are requiring that vendors charge sales tax on digital goods. So check with your state before determining that just because your crowdfunding rewards are not tangible they are also not taxable.
However, in some cases, such as when you are crowdfunding to create a taxable object like a children’s popup book, then you must become sales tax compliant.
This means registering for a sales tax permit with your state’s taxing authority, usually called the Department of Revenue.
Frequently Asked Questions
What if I only crowdfunded a small amount?
Barring economic nexus, most states don’t have a minimum requirement for when sellers are required to start selling sales tax. Even small sellers who only make sales around Christmas are required to collect sales tax.
Washington State, however, does have a small crowdfunder exemption. If you collect less than $12,000 in gross revenue from crowdfunding annually then you are not required to register for and collect their sales tax.
What price should I charge sales tax on?
Washington state, to date one of the only states that has given any guidance on crowdfunding, considers the minimum donation price for the item to be the item’s price. So if you were giving away a mixtape for buyers at the $25 donation level, then the price would be considered to be $25. In Washington state’s case, everything beyond that is considered a non-taxable donation.
Keep in mind that other states may not think this way. We recommend consulting with a sales tax expert if you are required to collect sales tax on a crowdfunding campaign.
How much sales tax should I charge?
This can get a little complicated. In most cases, you’d be required to charge sales tax at the combined sales tax rate at your buyer’s location. For example, the sales tax rate in Seattle, Washington is a combination of the 6.5% Washington state sales tax rate, the 2.35% city of Seattle and King County rate, and the 1.4% Regional Transit Authority tax rate. This is a total of 10.25% sales tax.
You can read more about how to charge the right amount of sales tax on every transaction here.
Unfortunately, many crowdfunding platforms are not set up to collect sales tax from your buyers. If you’re unable to collect the sales tax, you might be required to pay the sales tax due out of the funds you raised. Because of that, we recommend figuring potential sales tax liability into the amount you ask for when crowdfunding.
Overwhelmed by crowdfunding and sales tax? Hands off Sales Tax (HOST) is here to help. Contact us today for a free consultation.