California seeks sales tax exemption for video game industry

To give the California video game industry a boost, lawmakers are considering a sales and use tax exemption for certain products used to research, develop, and design digital interactive media.

According to a report released February 13 by the Milken Institute, a California-based nonprofit, nonpartisan think tank, competition is becoming fierce in the video game industry. All 50 states are now home to video game businesses, “and the gap between California and other states continues to narrow.” International competition is also becoming more significant.

The report recommends several tax incentives to “future-proof the state’s video game industry.” It proposes adapting “California’s existing sales and use tax exemptions to apply to video games.” Assemblymember Richard Bloom got right on it, introducing Assembly Bill 2574 on February 15.

If enacted, A.B. 2574 would exempt from state sales and use taxes the gross receipts from the retail sale of tangible personal property purchased for use by a qualified person primarily (i.e., more than 50 percent of the time) in the research, development, and design of digital interactive media. Additionally, it would exempt tangible personal property purchased for use by a qualified person to maintain, repair, measure, or test that property.

The bill specifies that local sales and use taxes would continue to apply to these transactions.

Since the exemption only applies to goods purchased to research, develop, and design digital interactive media, certain terms are defined.

“Design” means the process of designing the content and rules of digital interactive media in the preproduction stage, as well as the game play environment, storytime, and characters in the production stage.

“Digital interactive media” means interactive software that:

• Is produced for distribution on or via electronic media (e.g., downloaded from the internet or mobile networks, and software distributed on optical media)
• Allows users to interact with it via an electronic device (e.g., computer, game system, handheld electronic device)
• Includes an appreciable quantity of animated images, fixed images, music, sound, text, or 3-D geometry

Media containing obscene matter is excluded from the definition of digital interactive media.

Who is eligible for the exemption?

The exemption is available only to a “qualified person,” defined as any person primarily engaged in research, development, and design of the digital interactive media described in the North American Industry Classification System Manual, codes 511210, 512191, and 54151.

However, eligible purchasers will be liable for payment of sales tax, plus applicable interest, if within one year from the date of the purchase they do any of the following:

• Convert the property for use in a manner that doesn’t qualify for the exemption
• Remove the property outside California
• Use the property in a manner that doesn’t qualify for the exemption

Exemption certificate required

Retailers are not permitted to provide the exemption unless the purchaser provides a properly completed exemption certificate that contains the sales price of the exempt machinery and equipment.

The retailer must retain a copy of the exemption certificate, and make it available to the state tax authorities upon request.

See A.B. 2574 for additional details.

Other states provide the video game industry with a variety of tax incentives, which the Milken report says indicates a “desire to grow (perhaps even lure) the industry outside of California.”

Aside from an R&D credit, California doesn’t provide “interactive entertainment-specific incentives, whereas its competitors, Texas, Georgia, and Washington (as well as 18 other states) all offer digital media incentives to video game companies.” The report identifies Texas as a state that offers a video game industry sales tax exemption.

The more industry-specific sales tax exemptions a state provides, the more challenging it becomes for businesses to manage sales tax exemption certificates. Sales tax automation software can help you improve the way you collect, store, manage, and renew tax documents. Learn more.