Will eSports And Other Online Businesses Spike Digital Taxes?

Historians and economists regularly look to tax policies to get a sense of what happened within a particular industry, society or country. No doubt the chronicles to come about the rise of the internet age and the spread of digital culture will include serious treatment of tax issues.

Indeed, one of the biggest controversies involving eCommerce and its related areas – controversies not yet solved – involves whether and how to tax those activities. The latest issue involves eSports – one of the rising trends in digital commerce, and one of the ways through which some mall and brick-and-mortar operators hope to revive those retail properties. As one estimate put it, “in 2018, the global eSports market was valued at nearly $865 million, (and the) global eSports market revenue will reach $1.79 billion in 2022.”

State Pressure

All that growth is now reportedly attracting the attention of the tax man. As The Washington Post recently put it, “while professional athletes in the NFL, MLB, NHL and NBA – and entertainers – have been an attractive target to state tax collectors due to their public schedules and high salaries, gamers have been performing under the radar, until now. With the recent move to franchise type models for The Call of Duty League, Overwatch League and the NBA’s 2K League, states are becoming more aware of when these eSports competitions will take place within their borders, which teams have won big prizes and, more importantly, where the players are located.”

Indeed, it seems that in some states, winners at eSports competitions are waking up to the possibility that big chunks of their winnings – perhaps half or more – could be sent to tax authorities. As the report notes, officials in Pennsylvania are stepping up their enforcement of tax efforts involving eSports participants.

The issue isn’t really about brand-new taxes, but is about enforcing existing tax laws and applying them to eSports. “One prominent player Jay ‘sinatraa’ Won, apparently discovered this fact after winning the Overwatch League’s Grand Finals in Philadelphia in 2019, tweeting that 55 percent of his prize money for that event would be taken in taxes,” the report states.

Taxing Confusion

The realm of eSports is not the only place in the greater online world where taxes are a new and sometimes confusing issue in 2020. That’s largely because in commerce, new business models beget new tax problems. Against that backdrop, tax collection in the nascent restaurant delivery space remains fragmented at best, and confusing at worst.

And although we live in a three-dimensional world, tax policy has so many variables that it can seem like seven dimensions. Consider comments by Grubhub CEO Matt Maloney, who said in November that rivals should be charging more sales taxes on delivery fees. But in many cases, these firms may not be collecting sales taxes at all. Or maybe they are, but at the wrong rates.

The sector is projected to receive more than $10 billion in delivery fees by 2023, which represents a huge leap over the $4.4 billion received in 2017.

Perhaps nowhere has the state of food delivery taxation been more succinctly rendered than in this way: Stephen Kranz, a tax lawyer with McDermott Will & Emery, has said collection policies represent a “hot mess.”

The fragmentation is apparent in the fact that food delivery services are taxed according to decades-old policies that have not kept pace with the digital age. Online delivery services might levy taxes on food charges, or on the combined total of the amount charged for the food, fees and delivery charges – resulting in significantly different taxes collected. In some cases, the taxes are collected by the marketplace, and in other cases, such as noted by The Wall Street Journal, the taxes are remitted to the restaurants themselves, which in turn remit the taxes to the states.

In an interview with Karen Webster, Scott Peterson, vice president of U.S. Tax Policy at Avalara, took note of the challenges confronting even the most diligent food delivery firm that wants to make sure the proper tax amounts are being collected.

As Peterson told Karen Webster from PYMNTS, state and local governments are all over the board when it comes to what constitutes the proper amount to be taxed – and there’s even a lack of uniformity about which points of the food ordering and delivery process need to be taxed.

Of course, all of this follows perhaps the biggest tax battle so far for eCommerce – how to tax purchases made from out-of-state customers, and how to collect from retailers that may or may not have a physical presence in a particular state.

The Wayfair Impact

In a recent interview with PYMNTS, Liz Armbruester, senior vice president of global compliance at Avalara, said 2019 represented a watershed year for tax compliance as states embraced the economic nexus model and passed marketplace facilitator laws. The ground zero, of course, was Wayfair, the 2018 case in which the Supreme Court ruled online retailers could be mandated to collect sales tax – and taxes could be levied by states on firms that do not have a physical presence in those states.

“Going back to 2018, it was kind of like the world exploded,” Armbruester told PYMNTS, with a nod toward the Wayfair decision. “We knew it was going to happen. We knew that economic nexus was going to happen. And 2019 was about, ‘How does each and every state take that opportunity and figure it out for themselves?’”

What will happen with eSports and taxes remains a work in process. But questions about taxes are never really settled – especially not in this fast-moving digital environment.