The Many Different Sales Tax Scenarios for Board Game Sellers
- January 30, 2017 | Suzanne Kearns
Manufacturing and selling board games and card games is hot. In fact, if you look on Kickstarter, you’ll find more than 11,000 board game and almost 2,000 card game projects. One game, Kingdom Death: Monsters 1.5, raised $1 million in 19 minutes on the crowdfunding site, and has now surpassed $12 million.
But along with a quickly growing and profitable industry comes a lot of sales tax confusion. After all, there are many institutions that buy games for various reasons, and not all of them are required to pay sales tax. In addition, the sales tax exemptions offered to game manufacturers can be tricky. So we’ve put together a quick reference guide for game board and card game manufacturers to help you find your way through the sales tax maze.
Let’s start by taking a look at some of the sales tax exemptions that may be available to manufacturers and sellers of games.
Should You Pay Sales Tax on Your Game’s Production?
When you purchase products to incorporate into your game, some states will view you as a manufacturer, processor, or fabricator rather than a reseller.
Available exemptions vary by state. For example, in some states, such as New York, you’ll not only be allowed to purchase your game components like dice, pencils, and paper tax-free, but also the equipment you use to manufacture your product. Other states, like Texas, allow tax-free purchases of raw materials, some equipment, services performed on the final product to make it more marketable, and any tangible or personal product that makes a necessary chemical or physical change to the end product. (But don’t try to buy a hammer without paying sales tax, even if it’s necessary to produce your game board, because Texas has specifically excluded that item from the exemption list.)
In addition to the raw products, materials, and equipment needed to produce your games, you can also purchase the supplies and packaging materials needed to package your game tax-free in some states. For example, Pennsylvania allows manufacturers to buy supplies and materials tax-free for any packaging that is then passed on to the “ultimate consumer.” Every state has different rules on packaging exemptions, so be sure to check with yours.
Now that you've got a sense of the tax exemptions related to manufacturing your games, let’s take a look at the different sales tax scenarios you’ll face when selling them.
When Non-Profits Purchase Your Games
Just because the IRS exempts nonprofits from taxes, that doesn’t mean they are automatically sales tax-exempt in every state. In fact, states make their own rules when it comes to sales tax, and each determines whether nonprofit organizations such as schools, churches, hospitals, and youth organizations are exempt from paying sales tax.
For example, in California, a qualified school may be tax-exempt when purchasing board games to be resold for profit, but will have to pay sales tax if the game is bought to be used by the school. The same is true for other non-profit organizations in state. In North Carolina, nonprofits have to pay sales tax when buying products to use, but qualified organizations can apply for semiannual refunds of the tax.
In contrast, Michigan allows some nonprofits to purchase items tax-free for use in the organization if they meet four requirements, including that it is “consumed primarily in carrying out the organization’s exempt purposes.”
In other words, if you sell your games to non-profits, you’ll need to understand the sales tax rules in every state in which you sell.
When Distributors and Retailers Purchase Your Games
Most game creators use distributors to sell their products to the thousands of stores that buy them. These distributors make it easy for retailers to purchase games in bulk and even save on shipping costs. And when you use distributors to sell your goods, you shouldn’t collect sales tax from them because they act as resellers. Just make sure that the distributor gives you a valid resale certificate during the transaction.
The same holds true when you sell your games directly to retail stores. Because those stores will sell to consumers and collect sales tax on that sale, they can use their resale certificate to purchase the games tax free from you.
Odd Rules and the Importance of Staying Up-to-Date on Sales Tax Laws
As we said before, the rules in every state are different, and it’s important to stay informed on the rules where you operate. And just to emphasize our point, we want to point out two rules that are state-specific, but important to those who live there.
- If you offer play-by-mail games in California, your services may or may not be taxable, depending on how you set up the game.
- In Virginia, if you contract with a licensor to provide tangible personal property for the game such as photographs, their royalties may be subject to sales tax. On the other hand, if they only provide you with intellectual property rights, sales tax might not be required.
Consumer demand for board and card games is increasing. If you manufacture or sell them, be sure you understand all of your sales tax obligations.