Washington recently released an excise tax advisory (ETA) on the taxability of nonfungible tokens (NFTs) as it applies to sales and use and business and occupation (B&O) taxes. The draft guidance replaces the Department’s July 2022 interim guidance, as well as any previous conflicting taxpayer rulings or written reporting instructions, on the topic.
Unlike the interim guidance, the ETA provides a comprehensive overview of the taxability of NFTs, covering topics including sourcing, bundled transactions, apportionment, royalties, and reselling activities.
The ETA specifies when a marketplace operator crosses the line to become a marketplace facilitator, noting that a taxpayer does not need to process payments to be considered a facilitator. It also offers detailed registration and reporting requirements for NFT marketplace facilitators and sellers. Factors to consider in determining whether to register as a facilitator or seller include nexus and revenue thresholds.
Registered marketplace facilitators must report gross income from retail sales of NFTs under the retailing B&O tax classification. They must include revenue from NFT sales made on behalf of NFT marketplace sellers, and while they can claim a deduction for that income, they cannot do so for gross income from their own direct sales. A marketplace facilitator must provide its NFT marketplace seller with the seller’s monthly gross Washington sales made on its behalf.
Marketplace facilitators that have gross income attributable to Washington from other activities must report that income under the appropriate tax classification. Unless an exemption applies, marketplace facilitators must collect and remit retail sales tax on all taxable retail sales sourced to Washington at the combined state and local rate where the sale is deemed to occur.
Registered NFT marketplace sellers must report their gross revenue from NFT retail sales (other than sales for resale) under the retailing B&O tax classification. They cannot claim a deduction for their own NFT sales but may claim one for sales made by marketplace facilitators on their behalf. Sellers must collect and remit retail sales tax on direct sales at the combined state and local rate where the sale is sourced, unless an exemption applies.
Like the interim guidance, the ETA does not address exemptions, exclusions, or credits.
The examples in the ETA, especially those addressing fact patterns involving Washington’s use tax, are more in-depth and informative than those in the interim guidance. However, until the guidance is finalized, taxpayers are not to rely on it to compute their tax liabilities. The ETA suggests that companies request binding tax rulings for their business activities.
While the ETA provides more structured information on reporting and compliance, it is a draft and does not have an effective date. Taxpayers have until November 18 to comment on the draft guidance.
Washington’s effort to provide more structured guidance highlights the evolving nature of the taxation of digital assets and the efforts to provide clarity in this emerging market. It is highly likely that other states will soon both expand and tighten their rules on the taxability of NFTs and other digital assets.
BDO Insights
- Companies should carefully review Washington’s draft NFT rules, especially those regarding marketplace facilitators and sellers, to determine whether they need to register, report, and pay.
- Businesses can now be considered marketplace facilitators even if they do not process payments, which will require them to remit tax despite lacking access to transaction dollars.
- While taxpayers cannot rely on the ETA, they should familiarize themselves with information in anticipation of a possible finalization with immediate application.
- Taxpayers are encouraged to comment on the draft guidance to assist the state in finalizing its NFT taxation rules.
- Companies outside Washington should be aware that other states are likely to look to the guidance and follow Washington’s lead on the taxation of NFTs.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.