Sales Tax Slice: With Pokémon GO, In-Game Purchases Present Tax Questions For Those Who ‘Gotta Catch Them All’


Pokémon GO hit the scene last week, and enthusiasts across the country have been zipping around to find their beloved Bulbasaurs, Charizards, and Squirtles.  The game already achieved great success, raising Nintendo’s stock price by billions of dollars in a week and boasting nearly as many users as Twitter.  In short, we’re dealing with Pokémania.  That kind of revenue is sure to pique the interest of taxing authorities across the country.

Pokémon GO is an “augmented reality” game in which players use smartphones to search for Pokémon in the real world.  The game uses algorithms and users’ smartphones to decide which Pokémon appear.  For example, the game generates bug and grass Pokémon when a player visits a park and water Pokémon when the player visits a lake, as Vox discusses in a recent Explainers installment.  The game itself is free to play, and revenue is generated on in-game virtual sales of “incense” and “lure modules” to attract Pokémon.[1]

With respect to sales tax, sales of software and digital products create thorny taxability, sourcing, and nexus questions.  So, when I purchase that incense or a lure module, am I purchasing tangible or intangible property?  Is it even property, or am I buying a service?  As usual in state tax, the answer is “it depends.”

Sourcing is another challenge.  Which state has jurisdiction over the purchase?  For example, if I buy in-game incense or a lure module in New York City, does it matter that the game’s computer servers might be located at an out-of-state data center?  And what if my credit card is registered to a home address in some other state?  Does that information control for sourcing purposes, or do we infer from my New York geolocation information that the purchase should be sourced to New York?  These aren’t easy questions to answer.

Geolocation and augmented reality gaming present cutting-edge tax questions, and a lot of money is at stake.  From a tax perspective, it’ll be exciting to see whether states can “win the fight.” 

Continue the discussion on LinkedIn: How does your state tax digital products and in-game purchases?

For more information about state tax issues, sign up for a  free trial on Bloomberg BNA’s Premier State Tax Library.

By Ryan J. Voorhees

 


 

[1] Some enterprising businesses, like restaurants and coffee shops, are even purchasing lure modules to attract players and boost sales.