Bitcoin Users Beware of State Sales Tax Treatment
IRS Notice 2014-21 raised an interesting issue for state sales tax purposes since barter transactions involving taxable property/services are subject to sales tax on both ends.
UPDATE: On July 28, 2015, New Jersey issued Technical Assistance Memorandum TAM-2015-1(R), which replaced TAM-2015-1 that the state has previously issued earlier this year (see below). The new TAM explains the treatment of convertible virtual currency (“CVC”), such as Bitcoin, for New Jersey tax purposes. One notable change in the revised TAM is that CVC is specifically treated as intangible property for sales tax purposes, and thus the purchase or use of CVC is not subject to New Jersey sales/use tax. Only a seller that transfers taxable goods or services and receives CVC in exchange as consideration must charge sales/use tax based on the fair market value of the CVC in U.S. dollars as of the date of payment. This brings New Jersey in line with the other states mentioned below regarding the treatment of CVC for sales/use tax purposes.
In Notice 2014-21 (issued on March 25, 2014), the IRS addressed the tax treatment of convertible virtual currency (“CVC”), such as bitcoin, and concluded that CVCs are considered property for federal tax purposes. This raised an interesting issue for state sales tax purposes since barter transactions involving taxable property/services are subject to sales tax on both ends.
On Dec. 5, 2014, New York State issued memorandum No. TSB-M-14(5)C, detailing how the state would treat transactions using CVC for tax purposes. For corporate and individual income tax purposes, the state conforms to the federal treatment of CVC, and general tax principles regarding property transactions would apply.
With regard to sales tax, the memorandum explains that barter transactions involving the exchange of taxable property/services by each party to the transaction give rise to a sales tax collection obligation by both parties since each is transferring something taxable for consideration. With regard to barter transactions involving CVC, the state’s conclusion is that CVC is intangible property and thus is not subject to sales tax. Therefore, only the party providing CVC (i.e., the “purchaser) in exchange for taxable products/services is subject to payment of sales tax, and the party receiving CVC (i.e., the “seller”) would collect and remit the sales tax, if otherwise required due to nexus. If the seller does not have nexus, and thus does not collect the sales tax, the purchaser would owe use tax. The sales/use tax calculation would be based on the market value of the exchange, in U.S. dollars, at the time of transaction, and the seller must keep records of both the exchange value and sales tax collected, in U.S. dollars.
At least two other states have issued guidance regarding the sales tax treatment of transactions involving CVC. Both California and Washington treat transactions involving CVC the same way as any other sale of tangible personal property for a consideration, and both states use the seller’s advertised selling price of the product as the measurement for sales tax. 
However, New Jersey does not see it that way. On April 2, 2015, the state issued a technical advisory memorandum concluding that transactions involving CVC (which the state agrees is “property” per the IRS notice) are barter transactions and that both the seller and the purchaser must pay sales tax.  The memorandum notes that:
As a result, if a seller uses convertible virtual currency as consideration for goods or services, sales tax is due based on the amount allowed in exchange for the virtual currency. If the customer that provides convertible virtual currency in the trade receives property that is subject to tax, the customer owes tax based on the market value of the virtual currency at the time of the transaction, converted to U.S. dollars.
The memorandum is not clear on the procedures for collecting and remitting the sales tax. For example, does the purchaser collect and remit sales tax for its side of the barter transaction or should the seller collect and remit for both sides? We continue to monitor these issues and will publish any additional guidance in future issues of the newsletter.
Contact Jeff Glickman, partner-in-charge of HA&W’s State and Local Tax practice, at firstname.lastname@example.org for more information.
 See California Board of Equalization, Special Notice L-382 (June 2014) and Washington DOR website.
 Click here to view the memorandum.
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