Over the course of the past few weeks, it seems as if one simply cannot avoid encountering news of the Pokémon Go phenomenon. That is, if you were to talk to children on the street, they would be likely to explain the game and its concepts to you. Likewise, if you were to locate the business or finance section of The Sacramento Bee, you might encounter an article discussing how Nintendo – one of the creators of the game – has become more valuable than Sony and the most traded Japanese stock in a single day. And, if you were to peruse tech news, you may even discover that Pokémon Go has already surpassed the number of active users of venerable online services like Twitter.

While Pokémon Go can be found quite literally almost everywhere this summer, people may still not expect the game to potentially have a tax impact. After all, isn’t Pokémon Go merely a video game? Pokémon Go may be a game, but like many video games that have come before it, the sale of accounts and digital goods may create tax liabilities for players.

Do I Have to Pay Tax on Items I Purchase in Pokémon Go if I Live in California?

One of the most pressing concerns people have when engaging in online transactions is whether they are required to pay sales tax on in-game purchases. This is relevant to a Pokémon Go players’ concerns because the application follows a revenue model that is described as “freemium.” Under a freemium model, the game is initially free to play, but players have the option to purchase bonus items that give them enhanced abilities — with real money. These bonus items are 100% digital items, meaning that they only exist in the game and do not exist in the physical world.

tax lawyer in sacramento ca

The rules regarding the exact process in which one must engage to satisfy a state’s tax obligation will vary from state to state. In California, where NewPoint Law Group’s tax law offices are located, the California Board of Equalization has set forth a relatively straightforward test that can help a taxpayer determine whether a state sales tax applies.   The position of the California Board of Equalization is that digital goods are not taxable when they are purchased over the Internet and digitally transmitted. However, the sale becomes taxable if physical media of any type – such as a CD, DVD, or flash drive – is utilized to transmit or deliver the content.  Since Pokémon Go is a wholly digital product with no physical component, purchases made through the app are not subject to sales tax in California.

Am I Required to Pay Tax if I Sell My Pokémon Go Account?

While the purchase of digital goods may be tax-free in California, past decisions have made it abundantly clear that individuals who sell their digital online accounts are liable for taxes on the income. Many issues regarding the sale of digital accounts have already been addressed in the context of the sale of digital accounts for the game World of Warcraft.

In a recent Wall Street Journal article, the paper described the activities of World of Warcraft player Shane Jeffery. Jeffery played the game while in college as a side business routinely buying and selling game accounts. Reportedly, Jeffery made more than $60,000 annually – but Jeffery was required to pay taxes on the income he received through the game. In fact, the U.S. Tax Code requires individuals to pay taxes on all income they receive even if the income is illegal.

Consider that accounts are already selling for hundreds of dollars. Therefore, any individual who semi-regularly sells accounts will soon attract the attention of the IRS if (s)he does not pay taxes on the transaction.  If the person engages in account transactions regularly as part of a business, they almost assuredly will attract IRS attention due to the amount of money involved. Finally, the broad appeal of this game probably means that the IRS will be more likely to justify larger tax enforcement expenditures. Whereas the IRS was previously able to justify enforcement measures regarding the sale of World of Warcraft accounts, the risk is greater with Pokémon Go’s extensive popularity, which reaches far beyond the gaming niche.

tax lawyers in sacramento

Tax Concerns Due to Digital Sales from a Side Business? Contact a Sacramento Tax Lawyer

If you have sold digital accounts or digital goods online or in the real world, you may owe tax to the IRS or to the state of California. This can include income tax, payroll tax, and even sales tax. Taxpayers who fail to satisfy these obligations in a timely manner are often shocked at the aggressive enforcement and IRS tax collection tactics employed by the IRS and state tax agencies.

The tax attorneys of NewPoint Law Group understand these concerns and can help account for any and all tax liabilities created by the sale of digital goods or digital accounts. To schedule a confidential, legal consultation at our Roseville or Folsom law offices, call 1-800-358-0305 or contact our firm online today.