D2C Without a Tax Degree: How to Sell On a Web Shop Without Becoming a Tax Expert

Braden Thanks for joining us today on the latest episode of Growth Stage Gaming, our podcast where we help game publishers and studios learn more about all the ins and outs of going DTC. today we have a special guest, Rachel Harding, our senior director of tax here at FastSpring, who's going to break down what every developer and publisher needs to know about taxes as they are related to gaming from digital purchases like your skins or Currencies or battle passes to D T C web shops and beyond will cover why tax treatment differs from region to region The biggest compliance risks that publishers face and what happens when you move from a marketplace to selling direct?

Rachel is also going to share where most publishers get tripped up and ways that you can avoid those common pitfalls So if you've ever wondered how taxes actually apply to your game and how to navigate those global tax rules without a tax degree This conversation is going to help you learn a little bit more. So Rachel, tell us a little about yourself and ⁓ what you do here at FastSpring. Rachel Yeah, thanks, Braden. I know I'm sure taxes is everybody's favorite subject, but it is mine.

So I've been at Faspring for about five years now. ⁓ I am the senior director of tax here and responsible for anything kind of in the tax umbrella. I have about 15 years of corporate tax experience, specifically this kind of excise tax, which we talk about VAT sales and use tax. which is kind of the focus of what we're talking about today.

Braden Awesome. ⁓ So before we dive into taxes, do something a little more fun. What games do you play? Do you play any games?

What do you enjoy? What's your favorite game to play? ⁓ Rachel ⁓ Pretty much it's like limited to really like family holidays, but I love like the team games. Like I think it's co-ops, but Overcooked is a family affair.

We get everybody in, the nieces and nephews, ⁓ grandpa sucks, you know, like it's kind of our, ⁓ we get everybody together and at least play a few times over the holidays. Braden Overcooked is a great game. It's a very chaotic, it's a blast. And it makes or breaks relationships, sure.

Maybe it's a good thing you only play at the holidays because then you can leave the chaos. Rachel There are some people that can't be on a team anymore. It's better for the relationship. Braden That's hilarious.

I love it. ⁓ speaking of, you know, this teamwork and this cooperative work, Taxes can be complicated. It can be hectic and it can be a headache for teams that are working. And so I want to ask to begin, you know, for someone who is building a game today or a publisher who has games out in the market that are maybe considering going direct to consumer, opening a web shop, ⁓ why should they even care about...

taxes in the first place, what's important. Rachel Yeah, so I mean, we get this question a lot. ⁓ And there's kind of a couple of subsections of what could actually happen. There's like the real business risk that could happen when you're looking at fines and penalties, ⁓ financial burdens.

⁓ There are cases that you're at officers, depending on what country it is, can actually be put in jail. I've used that to mess with some of our officers here at FastSpring ⁓ So there's that business side, but then there's also things that could fall under, like if you were going to sell your company or get a minority majority investment, they're going to look at your tax operations and see what you did right, what you did wrong. And a lot of times there could be an adjustment for all the things you did wrong, meaning they're going to pay you less based on all the mistakes that you made.

There's also kind of this concept. statute of limitations that applies. If you've never filed or haven't done anything, taxing authorities have full jurisdiction. There's no limit on what they can kind of do or come after.

If you've applied and you your intent is good, the statute of limitation will apply, which is anywhere from three to four years. And that means that the taxing jurisdiction has three to four years to come after you for that year. for example, 2020, that is a closed year. So if you filed and you're good, it's all water under the bridge.

But if you haven't filed, things will come after you. Braden And does that apply every year? that something or is it like a checkpoint that you say, I started filing in 2020 and then I forgot to file in 2021 and then it's 2022. How does that work?

Rachel Yeah, so you have to look at each year. So if you didn't file in 2021, it's unlimited again. So, and once the year closes, the year's done, they can always come after you for that. So it's really something that it's better to always do something rather than nothing.

That's kind of what I recommend. Braden Okay. So it sounds like, you know, there's a lot of different rules, regulations that are applicable to this. ⁓ Why are the rules so different from, you know, region to region or country to country, you know, for things like your digital goods, like your skins or currencies or battle passes.

Rachel Yeah, honestly, your guess is good as much ⁓ like the states in the here in the states, we like to keep things really complex and do we always like to do things different, like not be on the metric system internationally. It's based kind of at the country, the federal level. So it's a little bit easier to determine what's taxable ⁓ kind of on the broader international spectrum. It looks.

at B2B, B2C. When you're looking at kind of the comp within gaming, it's really B2C. So publisher to player, those are really going to be taxable in almost every foreign jurisdiction. ⁓ It's a little more nuanced when you step into the US because it's a state level taxing regime.

It's not done at the federal. Each state wants to do it their own way. ⁓ It gets kind of into the details when you start to looking at of how the game is played. Like you mentioned, digital goods, those are kind of like an item or a non-physical good, and those are going to get taxed by about 20 different states.

The more you move into streaming or a live service game, more states are going to tax that. You have around 30, think 33, 35 states that are going to tax that. As far as kind of in-app purchases like skins, currencies, battle passes, most cases those are just going to default to the taxability of your game. So in this instance, your live service game that is going to be taxable in 33 states as well.

Braden Okay, so what happens then if I'm a publisher and I decide, you know what, I'm gonna go do this on my own and I file incorrectly. say, I'm a digital good. I'm not a ⁓ streaming or live service game. What's gonna happen or what could happen to me?

⁓ Rachel Yeah, what if you, mean, outside of just making the wrong determination for your product, you will technically then have exposure in all of those states. Cause you, let's say you're filing in only 20, those 13 states, then it's going to go back to that statute of limitations. And since you didn't tax them and you didn't file, it's, they're going to have jurisdiction to come after you. Braden Wow.

Yeah, that's pretty wild. ⁓ How quickly that can change things and how intertwined all of this is. ⁓ So then what actually is making the determination? We've talked a lot about these taxes and these different states, how you need to file, when you should file, but what actually determines where a publisher owes taxes?

Is it at the player location or where the developer is located or who the payment provider is, or is there something else entirely? Rachel Yeah, one thing we do is that the good thing about kind of excise like indirect tax, ⁓ which is not the case with income tax, because your tax on that is that it's technically not the publisher's tax. They shouldn't be paying out of pocket. The only time that they're going to pay out of pocket is if they do it incorrectly.

But if it's done correctly, ultimately, it's a tax that the customer, the player is going to be paying It's only if it's done wrong that it's then going to fall onto the publisher. where you tax, ⁓ you're going to look at the location ⁓ where the service is kind of consumed. And what that equates to is where a player is actually playing the game. ⁓ Operationally, it's your IP address, your billing address.

Those are really the only two kind of the main data points that companies kind of integrate and tax based on. There are some other like weird things you can look at, but ultimately those are going to be the two most sure ways of finding where a gamer is playing. Braden So then if I'm a publisher doing this, does that mean I need to be collecting what their IP address is, where they live, all of this data in order to stay compliant? Rachel Yes, you technically don't need as much information ⁓ internationally because it's a country level.

However, every jurisdiction really wants you to have its two pieces of corroborating evidence in order to prove the location of a player. ⁓ What that means is that if you're capturing one item, technically they could go back and prove otherwise that wouldn't be substantiated if you were to ever get into any kind of issue with the authorities. To be on the safe side, you want two pieces that can corroborate the exact location. Braden Okay.

⁓ And so I know that like a lot of marketplaces do this for you today. You know, your app store or your place store, like they're taking care of a lot of this for you. But as publishers start to move to this direct to consumer model, they build their web shops and other things. There may be they're moving away from marketplaces or maybe there's a difference there, but maybe you can perhaps you could just help help us understand what is a marketplace in the tax world and how is that.

delineation important as you think about direct-to-consumer payments and some of this data and other things. Rachel Yeah, and this is kind of like going to be the biggest, like more complex area. ⁓ You know, since the changes that have happened with the Google store ⁓ and, you know, they're a monopoly, they can no longer force people to sell. We have seen a lot of people kind of go start selling direct.

⁓ One of the biggest pieces that's going to change is the tax implications, and it's more so how it's going to be facilitated. If you're currently selling or you were previously selling it on Google or Apple, those are going to be considered kind of marketplace and they're going to follow marketplace facilitator rules. And what that means is, it's a shared liability. Google is responsible for the liability, but so is the publisher.

⁓ So a lot of times in the more complex places, Google is just actually handling that for on be on your behalf. The reporting can get complex because depending on the country, the marketplace has to report and pay or the vendor has to report and pay. It's best to kind of like, I assume most publishers aren't even really aware what's getting done on their behalf until they download a report. And it's like, what is this tax?

Where did this pay? Some in the US we pull up we follow marketplace facilitator rules. So what's gonna happen is Apple Google is going to pay on your behalf. There are states where you actually have to file, meaning you have to go claim that tax that was paid on your behalf.

⁓ A lot like I live in Colorado, Colorado is one of those states that you have to go do that. ⁓ So migrating off of Apple or Google and marketplace, you're gonna have to basically start doing that on your own if you sell direct. There's another option obviously selling through merchant record like FastSpring where we operate as a reseller, meaning you don't have any of that responsibility at all. It's actually less responsibility than what you had through Google or Apple as a marketplace.

⁓ The most responsibility is gonna be if you're selling direct. You're gonna be responsible for looking at kind of all the ⁓ where you sell into and figuring out what's taxable and where you need to file. Braden Okay, so if you wanted to do maybe, you know, in because steering is only allowed in the United States, can you still work with Google and Apple and also do some of this direct things, direct to consumer stuff through a merchant of record? Can you do them in tandem?

Rachel Meaning like partly sell through a market like through a marketplace and then partly sell through a more. Braden Yeah, yeah, sell the same things in both places. Rachel Yeah, that definitely that I would say that that's fun for me and like being in the tax room like, that sounds like kind of fun because you're going to get a little bit of variety and it's going to be different for non tax people that probably sounds miserable because not only do you have to know what your requirements are with within each of those models, the marketplace and then the merchant of record, you are going to then have just all these different things you're gonna have to comply with.

Either don't do it or do it. ⁓ It depends kind of on the different jurisdictions that you're in. Braden Right. That's fascinating.

That's, mean, again, just adds these layers of complexity that I'm not a tax person. So that sounds terrifying to me. Rachel Most people aren't. like, you know, it's one of those things like, Hey, if you want to deal with it, great, love it.

⁓ but it can, it can get complex. And if you don't like it, it's probably the last thing you want to deal with in terms of being a publisher. I don't think many people are into tax there. That's why they kind of went into being, ⁓ a publisher within the gaming world.

And they like kind of the graphics and the experience very different than very dry tax, whatever is their preference, but it is much easier to comply when you are using a merchant of record. Braden Okay. ⁓ So we also have seen, you you're talking about these options, maybe some publishers you've talked about like going direct, you know, differentiating from direct to consumer, right? Which is just selling directly to your player, but direct meaning I'm going to take on a lot of the liability.

I want to either be a payment service provider or I want to partner with one that doesn't operate as a merchant of record. What does that look like? And what's the Is there benefit to doing that from a tax perspective or is there an additional challenge that comes from taking that road? Rachel Yeah, so when you look at it's kind of like within the selling direct model, ⁓ most of the time you are going to need the help of ⁓ a PSP payment service provider to help you facilitate those payments.

It really depends on the services that PSP is providing, because if they are providing kind of the full suite and more robust set of services, they are going to fall into that marketplace facilitator. and then it will be more along the lines of what Google and Apple were doing. If it's more of just a standalone PSP, ⁓ it's going to be the liability of the publisher. ⁓ You really have to, hopefully they walk you through the criteria that shows you what you're responsible for because it really is, I mean, this is kind of a real time thing that's been changing and we're especially now as we're seeing kind of this abandonment ⁓ off these marketplaces.

⁓ So as things do change, these rules are not set in stone. And I expect them to change as the dynamics and the selling structure kind of within the digital space does change. So right now at a point in time, this is what the rules are like now. It can change and it probably will change very soon.

Braden That's so, wow. I mean, again, just so much nuance to all of this. Yeah. The nuance and the details.

Yeah. So then we've talked a lot about these different ways that you can go liability risk that you take on. What are the most common tax mistakes or pitfalls that you see publishers making when they decide to ⁓ do this on their own or ⁓ sell those things globally? Rachel We like contacts.

Yeah, I mean, the biggest, I think, mistakes we see is just not understanding how it's taxed, meaning the nuances between a digital good and gaming. ⁓ But the other thing I see a lot is this concept of like a filing threshold. ⁓ Publishers, different companies will come back and say, we haven't met the threshold. ⁓ What the threshold refers to is the volume of sales that you have in a given jurisdiction.

That kind of concept is really, it does exist internationally, but it's a lot smaller. It's maybe thresholds internationally have been moving to zero, but they maybe are like $10,000 internationally if there is a threshold. Within the US, can be, they're around 100,000. But those are also changing as well.

Some states have a two-part test where it's 100,000 and 200 or 100 transactions. What we are seeing is that it's just moving to a single test and the thresholds are starting to come down. So what was 500,000 is now 100,000. And we just kind of expect that trend to continue.

along with what's been happening internationally where the thresholds have been moving to zero. So what was once thought of, I'm okay because I don't have enough sales. We're on over the threshold is no longer the case just because the rules have been changing. Braden Right.

Okay. That makes sense. So it sounds like, I mean, there's a lot of things that you know that I wouldn't know, right? If we were to go out and make a game, right?

I would probably need somebody like you benefit of using a merchant of record like FastSpring, because you get that expertise out of the box. ⁓ but you know, I thought we've got Chat GPT, we've got AI tools and you can ask them just about any question. You get at least some kind of answer. how reliable may be questioned, like, is it possible to just use an AI service of some kind to get the answers I need rather than paying someone like you or using a merchant of record to do this?

Rachel Yeah, mean, trust me, I'm poking and prodding Chat GPT all the time just to see what it'll give me. What I actually have seen in the past like year and a half ⁓ is that it's starting to provide less and less. It's starting to have a more conservative approach and give you that language of, hey, taxes are complex. You need to consult your tax advisor.

⁓ It's really good if you just, you know exactly the question that you want and you understand the context of it. Meaning like, hey, I have ⁓ a downloadable game and my player is based in Missouri. Is this product taxable? Yes or no.

That kind of stuff is fine. But that's assuming you understand, ⁓ you know, location of the player and what the game is. If you give it, if you just dump all your operations into a Chat GPT and say, hey, what's my tax liability? it's not going to give you anything concrete.

It's going to say, hey, taxes are complex. ⁓ And it's, there's just a lot of nuances in that. But it's like anything, the more, you know, AI starts to learn us, it might get better. However, what I have seen is that it's starting to be more conservative and not giving you anything.

And like, you're trying to poke it to like, give me, make a yes, no determination. It's starting to back off of that. And that's probably due to like just they don't want to be, they don't want that liability to then come back to them if companies do start using that as their tax advisor. Braden That makes sense.

Yeah. Well, this has been extremely illuminating for me and hopefully it is our viewers as well. But before we sign off, what other last minute advice would you give to a publisher or studio who's interested in selling DTC and avoiding these tax pitfalls? Rachel Yeah, the one thing is just I always recommend to do something rather than nothing.

I understand that's probably a lot harder, easier said than done, mean. ⁓ But I also want to just like hear, I mean, hear from kind of our publishers. I would love to hear kind of real world questions that they have. ⁓ It is similar to digital goods, but it's a little more nuanced as well.

So. I would love if we could take some questions even at some point. ⁓ And hopefully that would give me a better kind of like, I can speak to anything, but understanding what some of the questions on their mind is would be great too. Braden Yeah, I love that.

Maybe we'll have to get you out to an event and we'll get you to have this conversation live with some people and get some live questions from our publishers. Or maybe we can find some folks online. If you're hearing this podcast and you want to chat with Rachel, you can reach out to us. You can reach out to us either by filling out our demo form and letting them know, Hey, I want to hear from Rachel, put her on the phone.

She can give my demo or you can probably send it to our support team as well as support at fastspring.com and they can get that message routed over to her as well. But we definitely would love to hear from you. ⁓ Well, Rachel, thank you so much for joining us today on Growth Stage for Gaming.

It's been an absolute pleasure and again, super valuable information you've shared today. Rachel Of course, thanks for having me. See you guys. Bye.

Braden guys.