Arkansas Determines that Sales Tax is Due on Crowdfunding Campaign Sales

Crowdfunding campaigns are a great way to raise money for a new product idea, but they can also give rise to unexpected sales tax exposure if not planned for properly.

By Jess Johannesen, SALT Manager

Eureka!  You have a great idea for the next best thing, but you’re tight on cash and can’t (or don’t want to) secure a bank loan or an equity investment.  You decide to pursue a crowdfunding campaign through a platform like Kickstarter or Indiegogo.  Your crowdfunding campaign was a huge success!  Now you’ve got the funding to develop the next best thing, and you have an interested customer base chomping at the bit for delivery of your product.  What you didn’t expect, however, is that you could be facing a steep sales tax bill if you didn’t properly plan your crowdfunding campaign.

A recent legal opinion from the Arkansas Department of Finance and Administration illustrates that a taxpayer can be held responsible for sales tax that it should have charged and collected from pre-orders taken during its crowdfunding campaign.[1]  The Arkansas-based partnership ran a crowdfunding campaign through a third-party platform to raise money to produce a card game.  The majority of the contributions were made for the sole purpose of receiving the card game in return, but a few pledges were simply donated to the campaign.  The crowdfunding campaign platform, however, did not provide the partnership with the billing addresses or any other geographical information for the contributors.  The partnership had been trying to track down the contributors via email surveys to collect shipping addresses, but not all contributors had responded.  Beyond such information, the partnership did not have any data regarding the location of the contributors.

Arkansas provides that a “sale” is defined to be the transfer of title or possession of tangible personal property…regardless of the manner, method, instrumentality or device by which the transfer is accomplished.[2] The opinion states that the partnership received consideration for the transfer of title to the card games on the date of receiving payment for the pre-orders, and that it is the receipt of payment (as opposed to the actual shipment of the product) that determines the timing for the collection and remittance of sales tax.  Accordingly, unless an exemption applies, sales tax is due on the entire consideration received, including a 5 percent service fee for the crowdfunding campaign platform.

The opinion notes that this, of course, assumes that all sales were made to buyers located in Arkansas, and then details the relevant Arkansas law for sourcing transactions.  Like many states, Arkansas’ sourcing hierarchy for retail sales provides various rules based upon the type of sale and the information available to the seller.[3]  For example, if the product is received by the purchaser at a business location of the seller, then the sale is sourced to that business location (i.e., over-the-counter sales at a retail store).  If the product was not received by the purchaser at the seller’s business location, then the hierarchy orders various purchaser locations (i.e., shipping address, address in the seller’s records, billing address, etc.).

If a seller runs through each sourcing rule and determines that such rule is inapplicable or that it does not have sufficient information to apply such rule, the catch-all provision then sources the sales to the address from which the tangible personal property was shipped.[4]  Although the opinion states that Legal Counsel is unable to provide a specific answer regarding the sourcing of the partnership’s pre-order sales, it appears that unless the partnership is able to obtain the contributors’ shipping addresses, Arkansas would take the position that all of the sales are subject to Arkansas sales tax since the card games are ultimately shipped from the partnership’s location within Arkansas.  Accordingly, the partnership would potentially be liable for Arkansas sales tax on the entire crowdfunding campaign’s pre-orders (less those donations made that were not for the purpose of receiving the card game).

This opinion highlights the need for a business not to engage in activity, however harmless it may seem, without getting advice from a tax advisor about the tax consequences of its transactions.  If the partnership in this case had reached out to Aprio’s SALT team, it would have been advised that its pre-sales are subject to sales tax, and that it must obtain each contributor’s address so that it would only need to collect sales tax on pre-sales to Arkansas contributors (and contributors in other states where the partnership has nexus).  By understanding the tax consequences, the partnership would have been able to plan the crowdfunding campaign properly and it would not be facing these sales tax liabilities.

Aprio’s SALT team has experience assisting businesses with understanding the state tax consequences of their transactions and operations in all states, and can help ensure that taxpayers plan those activities properly in order to remain in compliance with their state tax obligations and do not incur unexpected state tax liabilities and penalties.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2018 SALT Newsletter.

[1] Arkansas Revenue Legal Counsel Opinion No. 20180923, 10/15/2018.

[2] Ark. Code Ann. §26-52-103(26)(A).

[3] Ark. Code Ann. §26-52-521(b); Ark. Regs. §GR-76(D)(1).

[4] Ark. Code Ann. §26-52-521(b)(5); Ark. Regs. §GR-76(D)(1)(c)(3).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.