Washington Provides Guidance on Sales Tax Treatment of Crowdfunding

The Washington Department of Revenue (DOR) has provided comprehensive guidance on the sales tax implications associated with crowdfunding endeavors. Crowdfunding, often conducted online, involves three primary players: the host platform, project creators seeking funding, and backers providing financial support in exchange for rewards.

Of particular note is the tax impact on individuals or businesses involved in crowdfunding within Washington state. The DOR stipulates that if an individual’s annual crowdfunding income surpasses $12,000 (pre-host fee deduction) or if they’re obligated to collect sales tax on offered rewards, they are required to register with the department.

Key considerations revolve around the timing of tax obligations. Taxation occurs either upon project completion when the funding goal is met or upon receipt of funds by the project creator, depending on the project’s outcome.

Creators engaging in crowdfunding activities must collect and report sales tax on tangible items, digital products, or retail services offered as rewards. It’s imperative to explicitly state whether the pledged amount includes sales tax. Moreover, the applicable sales tax rate is determined by the location of the reward recipient.

A critical point highlighted in the guidance is that the service fee retained by the host cannot be deducted from the funding amount. This fee is considered part of the creator’s gross income and is thus taxable.

Regarding Business & Occupation (B&O) tax classifications, the guidance delineates distinct tax treatments based on the nature of the rewards provided. Donations or rewards with negligible value are generally exempt from B&O tax. However, tangible items, digital products, and retail services fall under Retailing B&O tax. Meanwhile, non-retail services are classified under Service and Other Activities, each subject to specific tax implications. (Washington Department of Revenue, 204-971, Guidance on Crowdfunding, December 2023)

Posted on December 12, 2023