There was a time when it was questionable if digital events could be profitable. Now that the fact they can be has been determined, it is time to focus on an important aspect – taxes related to digital profits. This is an extremely nuanced issue with several important factors to keep in mind. You’ll need to focus on where you’re located, where your attendees are located, what they’re doing, what kind of currencies they’re using, as well as a range of other factors. Consider these four key points as you work through the tax implications of all your non-face-to-face activities.
How much money are you making from your digital event, and how many attendees are there?
In the U.S., familiarize yourself with the concept of an economic nexus to make sure you’re in line with state taxation requirements when charging registration fees. An economic nexus includes the maximum number of gross receipts or number of transactions a business can have.
“If you meet the requirements for the economic nexus threshold for that state, then you need to confirm if your service is taxable because you may have a collection responsibility,” Brittany Aleman, senior director with Alvarez & Marsal Taxand, LLC, writes in Swoogo’s US Guide to Sales Tax for In-Person, Virtual and Hybrid Events, a useful resource to help navigate the maze of state sales taxes. “If you don’t hit the threshold for that state on either gross receipts or transaction amount, then you don’t have to worry about taxability or collection of sales tax for that state.”
Just like every state has its own sales tax rates, they all have different thresholds, although the most common caps are $100,000 in receipts and/or 200 transactions. So, if you’re hosting a small webinar that costs $50 per participant with an expected crowd of 100, you’re likely in the clear. If your conference attracts hundreds or thousands of online viewers from across the U.S., you’ll want to make sure your registration system is prepared.
What kind of event is it?
Are you teaching participants something? Or giving them content that keeps them entertained? The distinction can play a significant role in taxation.
“Whether sales tax is required is also based upon how the state classifies the event,” Kathy Pickering, Chief Tax Officer at H&R Block, told EventMB. “For example, a state could call the event entertainment, which would be taxable, but another could classify it as nontaxable education services. So, the organization would have to determine the event’s classification before making the determination on whether or not to charge sales tax.”
Are you providing a service or hosting an event?
As online events expand your community’s global reach, you’ll need to consider the VAT framework in the EU. Currently, it’s a confusing mix of digital services versus events.
“An example of a virtual activity that could qualify as a digital service is an online exhibition where the organizer simply allows virtual users to enter a particular virtual location but does not interact with them in real-time,” Aleksandra Bal, indirect tax technology and operation lead at Stripe, recently wrote for Bloomberg Tax. “The fact that such an event would allow real-time human interaction among the event participants is irrelevant as only the involvement on the side of the supplier is taken into account for VAT purposes.”
Events, on the other hand, are about doing something – not just entering somewhere, according to Bal. “This term covers the right to participate in an activity, such as a course or seminar,” Bal wrote. “In other words, an event does not require access to a specific physical location; it is participation that matters.”
That head-scratching difference looks like it’s on the way out, though. Bal points to new legislation that will likely go into effect in 2025. “Once [the new rules] take effect, it will no longer be necessary to engage in a complex exercise of determining a real-world location at which a virtual event takes place,” Bal wrote. “Admission fees to virtual events will be subject to tax in the customer country, which is already a common practice for all digital services.”
What are your organization’s plans for entering the metaverse and dabbling in digital currencies?
You’ve been hearing a great deal about the metaverse. While the thought of a parallel digital world might sound light-years away for traditional business events, plenty of major companies are betting that a new generation of consumers will make virtual reality a revenue reality. In the U.S., Lisa Greene-Lewis, CPA and tax expert at TurboTax, points out that states are looking at the digital landscape in different ways.
“[Organizers] should look into the tax rules determined by the individual states since individual states are proposing different tax rules when it comes to digital products and services,” Greene-Lewis told EventMB, “and this is a new landscape related to digital services where states are adopting their own regulations.”
At the federal level in the U.S., the IRS is trying to keep up with the rapid pace of digital currencies – the money that powers the metaverse. For now, these are murky waters.
“When the organization is paid in virtual currency [for ticket sales or for merchandise sold during an event in the metaverse, for example], there are some extra steps on top of reporting the revenue that need to be taken into consideration, such as recording the time and date of the transaction which will help to determine if the organization has long-term gain/loss or short-term gain/loss when it later disposes of the asset,” Pickering said. “This will also be helpful if the organization receives multiple units of the same type of currency and later sells them in separate transactions.”
“The organization will also need to record its basis in the virtual currency to help determine any gain or loss when the organization sells or exchanges it later,” Pickering added. “The basis of the virtual currency will be the value of what was given in exchange for the currency. For example, if the organization accepts cryptocurrency in exchange for a $200 ticket to an event, the organization’s basis in the cryptocurrency received will be $200.”
Cryptocurrency will inevitably raise some eyebrows from anyone skeptical about its ability to enter the mainstream payment system, but it’s already impacting traditional pieces of the events ecosystem. Hotels like The Bobby in Nashville and Resorts World Las Vegas have begun accepting a range of cryptocurrencies.
Perhaps one day in the not-too-distant future, one of those guests will check in, pay for their room in bitcoin, and put on their VR headset to participate in an event hosted by an organization with a physical headquarters in Sweden that owns a piece of real estate in the metaverse. Who pays taxes for what then? Who knows. Stay tuned to EventMB as we work on updating organizers on the ever-evolving world of virtual events with real-life financial implications.