A Complete Guide to Getting Your Video Games Taxed Hassle-Free

If you sell video games online, you are likely to find yourself in a predicament, facing several awkward financial uncertainties related to taxes. Because they are available in digital and/or hard copy and can be sold from and to any location, it is difficult to slot video games into one tax category. On top of that, video game transactions often do not occur within the tax code of a single region. So you’re probably wondering why video games are taxed and, more importantly, how.

When the gaming industry started to experience tremendous growth and virtual currency transactions skyrocketing, governments worldwide developed the necessary legal mechanisms to capitalize on this impressive growth spurt. As a result, online and downloadable video games were subject to taxation according to the rules and regulations specific to each country. It’s important to note that the U.S territory is a separate case due to its many states - each state or even county is allowed to decide what taxation rules will be applied in their jurisdiction. 

One way to ensure that you remain compliant regarding your taxes is to implement a step-by-step process that you should repeat every season. This protocol must include everything from determining the taxation jurisdictions applicable to your products and liaising with your tax practitioner to submitting your remittance promptly. We’ve created the following handy but comprehensive article to help you figure out how to get your video games taxed hassle-free.

The 4 Step Research to Determine Your Video Game Tax

To determine which of your products need to be taxed and how you must first check how taxes work in your area. Certain regions (like the US) have economic nexus, yet others have different ways of regulating tax remittance. You must know which of these applies to your business!

Taxes are such a complex issue that cannot be handled with a one-size-fits-all approach, so you’ll need to research what tax regulations apply to you and keep up with any compliance changes. The legalities can differ across countries, states, and even metropolitan areas.

The first thing you should know is that there are different types of taxes. The US enforces a state-governed sales tax, which means that tax regulations vary from state to state. Canada, however, is a more complicated case.

It is relevant to point out that the HST operates similarly to GST, with a similar tax base. The GST rate in provinces without an HST is 5%, and the GST/HST combined rates are 15%, except in Ontario, where the rate is 13%.

Another example is South Korea, which introduced a uniform 10% value-added tax (VAT) on sales in 1977 and has remained unchanged. Remember, however, that tax regulations aren’t always so consistent – South Africa, for instance, increased its VAT from 14% to 15% in 2018. For this reason, you must make it a point to always keep up to date with your region’s tax laws.

Step 1: Understand Economic Nexus In Your State

Economic nexus refers to “the connection a seller must have with an area before they’re required to charge and collect sales tax there”. Your sales revenue must match a specific area threshold to attain economic nexus. This threshold will vary across tax jurisdictions, so stay updated with tax legislation in the relevant regions and thoroughly understand where you have nexus.

Step 2: Keep Track Of Return Deadlines

One of the most vital things you can do for your company’s reputation is to keep track of tax return deadlines so that you are always in compliance. These can differ across industries and even change, so be vigilant in knowing which deadlines apply to you and act accordingly. 

One of the most common mistakes many new companies make is not adhering to tax deadlines simply because they aren’t aware of them. Furthermore, when you miss a deadline for submitting a return, you will incur additional fees that could have been avoided if you had paid on time. 

Therefore, a designated person should be responsible for keeping a schedule of all relevant tax returns and submission dates and noting which documents will be required for submission. In many cases, this will take a team of people to handle, depending upon the size of your business and the scope of your global sales.

Step 3: Plan A Tax-Payment Schedule

Once you’ve figured out your applicable deadlines and jurisdictions, you must create a comprehensive tax-payment schedule for your products or streaming services. This should include the dates of which payments are due, noting any differences for the various areas, and where you are eligible for refunds. Update your schedule regularly as needed, and remember to share it with your tax practitioner so they can let you know if there’s anything to adjust.

Setting up a tax-payment schedule will not only allow you to see when you have to submit your returns, but it will also allow you to plan for future such transactions. You could even set up automated payments – but be mindful that you still have to update these when requirements change.

Step 4: Stay Up To Date With Tax Regulations

Much like the state of the economy, regulations seem to be in a constant state of change. Sometimes businesses will continue paying taxes as they always have, without realizing that rules have changed. This oversight can, unfortunately, lead to some tax issues and unwelcome surprises later! They may find themselves in arrears or even be fined for non-compliance. This can be avoided by ensuring you adhere to your area's most current taxation laws.

Identify Your Taxable Products

Every SaaS business needs to identify what online streaming service or online games they are offering. Are you a traditional SaaS offering your customers subscription-based access? Are you a Micro-SaaS company that has created a hyper-specific online gaming masterpiece that can only be sold once off per customer? Or are you a hybrid SaaS and PaaS company, which both offer games and provide the platform on which they can be played?

Once you have identified the type of service you offer with your games, you will be able to specify the taxable products you offer. These products will be taxable depending on the product's jurisdiction, nexus, and nature. In short, you will be responsible for determining if and how your game and any related products (such as Downloadable Content) need to be taxed.

Once you have a complete list of all your taxable items, you can begin to adjust their prices to include the percentage of tax they require.

Video Games As Digital Products

A video game combines digital multimedia components that work together to form a single unit of digital media. Because they comprise multiple units of multimedia content (as opposed to single media items like music files), video games have a rich and complicated history in finance and legislature. Add to that the ability to sell games physically and digitally, and you have the tax problem of the modern video game.

Thankfully at present, however, we can tell you that because games are created digitally and operate on digital platforms, no matter how they are bought (as digital or hard copy), they ultimately count as digital products. When figuring out how to tax your products, make sure you’re looking at the digital tax legislation in the relevant regions.

Digital Product Taxation

Remember, we warned you it was very confusing! The laws that govern tax on digital products are still evolving, so you have no choice but to research how digital products are taxed in all the relevant jurisdictions. Some consider digital products tangible personal property and should have the same tax treatment, yet others consider certain digital products intangible goods and do not tax them.

Another essential point for SaaS video game developers to consider is what kind of game they sell. If it’s a game that can be bought in its entirety as a one-time purchase, then the tax on that would also be charged only once. If, however, your game includes DLCs and micro-transactions, then you would need to identify the taxability of these in addition to your base game.

Categorize Your Products As Tangible Or Intangible

The boundary between the digital world and the ‘real’ world has become increasingly blurry. As such, tax laws that previously only applied to physical products are now being amended to include digital products.

Determine Taxability Per Product

Once you’ve determined which of your products are tangible or intangible, you’ll be better able to identify which are taxable.

Verify Tax Remittance Requirements Across Relevant Regions

Remember, it isn’t just taxability that varies across jurisdictions; the percentage you are required to tax – and therefore what you pay to the government as tax – will also vary.

If you’re a non-US business selling your game through a US-based platform (such as Steam), you’ll need to check if your country shares a tax treaty with the US. You can do that here.  According to Steam, if your country doesn’t have a tax treaty with the US, they will be required to remit 30% of your revenue to the IRS. Ouch.

File Your Taxes Correctly: The 4 Essential Steps

Tax compliance is something every company needs to keep in mind while implementing internal processes concerning transactions and documentation.  You must keep detailed, accurate, and regularly updated records of your company's sales figures. Return forms will require specific information, such as proof of your customers’ legitimacy and the legality of your transactions.

1. Acquire All Relevant Customer Info Upon Purchase

Your customer’s checkout process is essential to your tax compliance protocol. Ensure you obtain all the necessary information from your client (such as their name, contact information, and physical address) before the final purchase is complete. Keeping a detailed record of your customers and their purchases will ensure that you always have the required information on hand for tax returns and any queries that might come about later.

2. Keep a Record Of All Payments, Receipts, and Invoices

Thanks to technology, we no longer have to stuff our receipts into desk drawers and handbags. A massive range of SaaS tools is available to help you keep track of your payments, receipts, and invoices. Keep these documents correctly dated and filed, and you (or your tax accountant) will have an easy time when it’s time to file your taxes.

3. Track All Documentation

Save every single form of communication you have with your business stakeholders. Stakeholders could include customers, sponsors, third-party consultants, outsourced agents, and creditors. Having all your documents in place will streamline your tax filing process and protect you and your software, SaaS, or online gaming business from being taxed incorrectly or fined for non-compliance.

4. Enlist Help From A Tax Professional

It’s certainly an option to do your taxes in-house. But as a video game company,  like everyone else, you already have plenty of other tasks on your plate besides developing your game and running your business. We know that video game developers – especially indie developers – often have to do their marketing, social media management, project management, and sourcing of funds. Trying to keep track of tax deadlines and payments while spreading yourself so thin that you may miss crucial details and important deadlines can quickly occur under these circumstances.

Ensure Early Tax Compliance

Realizing that you’ve missed a tax return deadline will add to the stress of running your business because you will still have to file that late return and pay non-compliance fines. The best way to avoid this fate is to ensure all your tax documents and forms are in order as early as possible.

Register Correctly For Tax

If it’s not obvious, your business must be registered correctly, ensuring it is done in all the proper regions. Remember that you must register well before tax season, so no potential delays are causing you to miss a return deadline.

Ensure All Registration Documents Are In Order

Make sure you have every document necessary for your company to qualify as a legal video game company in your country and state. Don’t forget to keep them in a secure location. It’s also a good idea to store encrypted copies of these digitally so that you have access in case something happens to the hard copies.

Regularly Update And Organize Your Financial Documentation

You will need to update and organize all your financial documentation (such as receipts, invoices, customer information, business expenses, and so forth) at regular intervals, whether quarterly or monthly. The frequency of these updates will depend on your tax dates and the financial workings of your company.

How can PayPro Global Help?

Keeping track of video gaming taxation is a headache, especially when managing everything else that goes into running a gaming business. This is why PayPro Global offers its partners a unique Merchant of Record model, providing video games developers as well as other players in the SaaS and software market with the much-need tools and services to scale smoothly into any market, covering everything from payments to tax and subscription management and working dutifully to be your trusted advisor. If you sell eBooks online, SaaS, or video games, having a dependable partner who can remove the tax liability and easily take the load off your team’s shoulders is essential. 

With over a decade of experience and a team of experts highly versed not only in sales tax laws, PayPro Global's cloud-based solution gives you the needed flexibility to secure your international growth without worrying about taxes and all areas of compliance.