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Kickstarting and Taxes

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Black Table Games
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Hi everyone,

Black Table Games here. We're about to launch a Kickstarter for a game we've been working on for more than a year - Inglorious Space.

We've done a lot of research into the tax ramifications for this but haven't found a good answer for an important question. We are based in Washington state and are wondering do we charge WA sales tax on each game sold or do we only charge sales tax to backers buying in WA?

Anything anyone can tell us (either from personal experience or from dealing with another person who Kickstarted a project) would be much appreciated.

Thanks for the help!

Gabe
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I think it boils down to

I think it boils down to whether people are buying a product or investing in a project and receiving a thank you gift.

I ran a successful Kickstarter a while back and didn't worry about state sales tax. The IRS is going to see it all as taxable income, and you'll have to claim your business expenses to only pay taxes on the profits. (But you probably already know that.)

All that to say, I've never seen a KS do sales tax.

Fhizban
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I can only give you feedback

I can only give you feedback from an european perspective:

The amount of money generated via crowdfunding is subject to taxes. This has nothing to do with copies sold. Instead a percentage of the money gained via Kickstarter or any other platform must be paid in taxes.

many people take a high risk and start a crowdfunding without a proper company. and therefore a proper way to pay their taxes. this way is illegal as you evade tax. punishment in form of a money penalty or even jail is the consequence.

a 10,000 USD kickstarter is therefore required to pay 2,000 USD in taxes (20%) regarding to european law (this can vary depending to the state you are living in). and KS gains another 10% from the remaining money.

if done professionally (and that includes taxes). you should really ask yourself if it is worth the effort.

KS is not about the money anymore. it is about generating a initial crowd of customers (fanbase marketing).

just my 2 cents. all my postings represent my personal opinion and are in no way meant to be the wisdom or the truth.

Black Table Games
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It will be buying a product

It will be buying a product which means we can't go the gift route.

Because this is essentially an online business endeavor (similar to selling anything else online), we're wondering if the same or similar sales tax laws apply. And WA state has pretty high sales tax, all things considered, so it's a big factor for us.

Thank you for your experience, Gabe! Your help is appreciated!

Black Table Games
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We are definitely more

We are definitely more interested in spreading the word about our games more than generating money. I think MOST people in this community are in this for love of the games rather than love of money.

We DO have a legally registered business entity that is being properly taxed (annually and quarterly).

I think most of what you've given is pretty true in the US too. Thank you for your help, Fhizban!

questccg
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Just remember

As a legally registered business you don't need to pay taxes in the year that the funds were obtained (KS completion). That money is considered debt until you can produce and ship the games to customers. Once this occurs the income becomes taxable as a registered business (normal income tax).

This has nothing to do with sales taxes as your original question (OP) but I wanted to just put this out there so you know unlike individuals who have to pay taxes in the year they earn the income, businesses can differ payment of taxes until sales have been completed.

Black Table Games
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Thank you everyone! This has

Thank you everyone! This has been extremely helpful.

I Will Never Gr...
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Black Table Games wrote:Hi

Black Table Games wrote:
Hi everyone,

Black Table Games here. We're about to launch a Kickstarter for a game we've been working on for more than a year - Inglorious Space.

We've done a lot of research into the tax ramifications for this but haven't found a good answer for an important question. We are based in Washington state and are wondering do we charge WA sales tax on each game sold or do we only charge sales tax to backers buying in WA?

Anything anyone can tell us (either from personal experience or from dealing with another person who Kickstarted a project) would be much appreciated.

Thanks for the help!

You won't actually "charge" WA sales tax on games sold to WA backers (unless you add a specific pledge level for WA residents), but you will be responsible for paying the tax on those specific games.

Games sent to kickstarter backers in other jurisdictions (ie: outside of the state your company is registered in) are not subject to local taxes.

Black Table Games
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We had an idea it was

We had an idea it was something along those lines. Thank you!

Black_Cockatoo
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Fhizban wrote:a 10,000 USD

Fhizban wrote:
a 10,000 USD kickstarter is therefore required to pay 2,000 USD in taxes (20%) regarding to european law (this can vary depending to the state you are living in). and KS gains another 10% from the remaining money.

No, the contributions are considered revenue or assessable income and you are taxed on profit or taxable income. This means you deduct expenses incurred in generating that profit (ie printing the game and postage) to get from assessable income to taxable income, as has already been stated. You will not in your example pay $2000 in tax on a $10,000 kickstarter for this reason.

Are you're suggesting he register his small business as a legal corporation for tax purposes when he could just register the business and pay tax on its profits as income as an individual?

What income are you presuming he will earn for him to be paying 20% of his entire income?

I believe that Kickstarter takes 5%, not 10%.

I'm coming from a diploma in accounting.

questccg
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8%+

Black_Cockatoo wrote:
I believe that Kickstarter takes 5%, not 10%.

It's 5% Kickstarter and 3%+ for Amazon payments. Figure AT MOST 10% but it is closer to 8%... Budget for 10% and be happy you have some money left over... :)

From Kickstarter:

Payment processing fees = 3% + $0.20 per pledge

So it's a little bit HIGHER than 3%...

Note: This means on a $10 pledge, it's 10% in total. 5% KS, 3% Amazon + $0.20 (2%).

questccg
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My 2 cents

Fhizban wrote:
KS is not about the money anymore. it is about generating a initial crowd of customers (fanbase marketing).

I agree with THAT ^^^.

The larger your fanbase, the greater the odds for "re-occurring" success. Take a small step, earn 250 Backers and then help grow that to 5x the number or 1,000 backers. Not in two (2) steps - but maybe three (3) steps.

I strongly doubt that you'll go from 250 -> 1,000. You might go 250, 500 and then 1,000. If you can produce quality games people want to play.

This has been the route that all the successful KS Entrepreneurs have each done. Start with one game, make some money + gain some backers and then grow that fanbase for the next game.

But generally speaking if you HAD a crowd of 5,000 backers, you could easily market games to them and probably sell your published game from different authors. I think it's a false conclusion to say that every game will be from the original author.

No it's a progression (for some). You start off with your own game ideas and then sell through those and then try to get games from other designers and become a "web-publisher" that KS games for other designers.

Something like that... Just my 2 cents.

Fhizban
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@Black_Cockatoo: My statement

@Black_Cockatoo:

My statement was from a european (especially german) point of view. We had a discussion about this once and there are several articles on the net:

In germany, the total amount of money you get from a Kickstarter is considered as Income. So you have to pay taxes based on that income as whole.

Tax office does not care how much your product costs, when its released or what you earn. they say you earned already due to the kickstarter. and this income must be taxed.

I can search the article, but its in german.

@ Black_Cockatoo / @questccg:

those 10% where a rough estimate including all side-costs etc. its close to 10% actually

questccg
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Not sure I agree

Basically there are PROFITS which are TAXABLE as EARNINGS and then there are EXPENSES which you deduct from the total amount to determine the amount of PROFITS.

So IF your Kickstarter earns $20,000 and it costs you $15,000 to produce it (Artwork, Graphic Design, Manufacturing and Shipping costs), your TAXABLE profit is only $5,000.

And therefore once you ship out your games, the amount LEFT OVER is the taxable amount. Not the GROSS amount, the NET amount.

And as we all know if you pay 20% of $5,000 well that's $1,000. But as a company you may have LOSSES that can offset the payment of profit. And therefore produce a NET Balance of $0...

As an individual, you can't have "debt" (in the income sense). Therefore you are TAXED on earnings in the year that your get them. So as my accountant explained to me, an individual collect $20,000 in earnings in 2016, has to pay taxes on that amount IF he doesn't pay for EXPENSES in that same year. It's considered TAXABLE INCOME. And it cannot be deferred like a company.

You may deduct EXPENSES if you have them in the same YEAR. But at the end of the year, whatever amount you are left over is considered TAXABLE...

Black_Cockatoo
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@Fhizban "German income tax

@Fhizban

"German income tax law allows a considerable number of taxpayer’s costs to be deducted from income when computing taxable income. This applies in particular to costs immediately related to earnings."
https://en.wikipedia.org/wiki/Taxation_in_Germany#Deductions

Fhizban
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@Black_cockatoo yes of course

@Black_cockatoo

yes of course there is a lot of freedom about the deduction of taxes in germany. but this does not change my initial post and why i posted that. and, in order to deduct from taxes, you first must pay taxes - and in order to pay taxes, you must do something similar to a "sale" in order to have a taxable earning.

I took my time to research and write down all the stuff once more.

super short summary of the financial side of a KS:

European Tax regulations for a KS (Im NOT from the US!)

1. Do i have to pay taxes for a KS (just for the KS)? - YES
2. Do I need a taxable business to run a KS? - YES
3. Is money gained via KS that is used to make a product a free gift? - NO
4. what is reward based KS, is it a gift? - NO, a legal buying contract

http://www.ikosom.de/2014/02/08/welche-steuern-muss-ich-beim-crowdfundin...

the blogger repeats what I said, you got to pay taxes on the amount you "earned (!)" via a kickstarter because its a kind of buying contract. you do not get anything free via KS.

and the rest:

http://www.existenzgruender.de/SharedDocs/BMWi-Expertenforum/Steuern/Fin...

http://forum.golem.de/kommentare/wirtschaft/crowdfunding-kickstarter-unt...

http://rechtsanwalt-schwenke.de/crowdfunding-kickstarter-und-co-rechtsbe...

http://www.mediafon.net/meldung_volltext.php3?id=53d664718de08&akt=news_...

http://www.ebit4u.com/wp-content/uploads/2014/07/Steuern-und-Crowdfundin...

@Black_Cockatoo

yes, you can reduce the amount - there are various ways, but this does not change the fact that the money you gain via KS is taxable (at least here). not the products shipped or anything else.

In addition, raising money via KS without a taxable business brings you right into jail over here.

@all

Why did I bring this argument into the discussion at all? Why did i say "its not about gaining money anymore?". Look at this example:

Say you have a KS under german law running with a 10.000 Euro target. Thats what you need to get your game produced.

you hit 10,000 and after the KS fees and handling fees (which total up to about 9% - its 5% plus 3-5% transaction fee) you receive 9.100 EUR.

Now, you have to pay 19% taxes (here in germany/europe) so this reduces the actual money you gain 7647,06 EUR. which is a lot less than 10.000.

now, if you aimed for 10K and calculated your production cost with that, you are horribly wrong. (I do not say that Questccg or Black_Cockatoo or any other reader on here does that, this is more a general assumption).

You also have to keep in mind that the marketing you put into the KS must be paid, also the production of your game AND the shipping, especially world wide shipping. there are many little costs that add up to your total and eat away your budget.

so after all, the money gained via KS is not as much as it seems. If you do it right, it can finance your initial print run. if you do it wrong, its not even enough to cover your costs.

so the actual worth of a KS lies in the fans and buyers who form a initial fanbase to you, your product and your brand. thats the true purpose of KS in my eyes, nowadays.

its a crowd-marketing platform, not a crowd-funding platform

with board-games, that rarely sell more than 1.000 copies there is one other aspect: it helps you sell your complete initial print-run in one go, if you do it right. so it takes a lot of the risk out of selling each copy inidividually and have the rest sitting on the shelf in the backroom of a small hobby store somewhere out in the country.

and one more final bit of info:

http://de.ign.com/star-command-145286-android/79528/news/was-passiert-wi...

the funding of "Star Command" raised 36.967 US dollars, after deducting all taxes, fees and production costs, the cost of marketing and eyerthing else. they where left with 4.000 US dollars to pay their own salary. which is (divided by the number of people) way below the official salary.

marketing tool? yes

free money? hell, no!

cheers
-Tobias (Fhiz)

Black_Cockatoo
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Fhizban

Fhizban wrote:
@Black_cockatoo

yes of course there is a lot of freedom about the deduction of taxes in germany. but this does not change my initial post and why i posted that. and, in order to deduct from taxes, you first must pay taxes - and in order to pay taxes, you must do something similar to a "sale" in order to have a taxable earning.

I took my time to research and write down all the stuff once more.

super short summary of the financial side of a KS:

European Tax regulations for a KS (Im NOT from the US!)

1. Do i have to pay taxes for a KS (just for the KS)? - YES
2. Do I need a taxable business to run a KS? - YES
3. Is money gained via KS that is used to make a product a free gift? - NO
4. what is reward based KS, is it a gift? - NO, a legal buying contract

http://www.ikosom.de/2014/02/08/welche-steuern-muss-ich-beim-crowdfundin...

the blogger repeats what I said, you got to pay taxes on the amount you "earned (!)" via a kickstarter because its a kind of buying contract. you do not get anything free via KS.


Wikipedia doesn't read 'deduct from taxes' it reads 'deduct from income' ie revenue when determining income to pay tax on.

Nowhere on Kickstarter does it say that your expenses are not business deductions.

Your earnings as an individual are your business's profits, not its revenues.

Your source is some random blogger in a language I obviously don't understand, not Germany's tax department.

Looking also at corporations tax:
"Taxable profits are determined using the result posted in the annual accounts (balance sheet and Income statement) drawn up under the Commercial Code. What is deemed income under tax law sometimes diverges from the way earnings are determined under commercial law, in which case tax law provisions prevail."

This means
a) You are taxed on profits, not revenues and
b) 'Earnings' has a different meaning in tax.

However don't get assessable and taxable incomes confused:
"The assessment base for the corporation tax charged is the revenue which the corporate enterprise has earned during the calendar year."

This means revenue is considered ASSESSABLE income, not TAXABLE income, which is what you actually pay tax on, hence the name.

Germans are taxed on profit, not revenue.
Just like the rest of the world.
Relax.

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