Pennsylvania and Washington Address Sales Tax on Non-Fungible Tokens (NFTs)
July 29, 2022
By: Jess Johannesen, SALT Senior Manager
Mitchell Kopelman, Partner-in-Charge, Technology & Blockchain
At a glance
- The main takeaway: Pennsylvania and Washington are the first states to specifically issue guidance on the sales tax treatment for NFTs.
- Assess the impact: It’s unclear how other states will address sales tax regarding NFTs and whether Pennsylvania and Washington will collect sales tax on transactions that occurred prior to the guidance being issued.
- Take the next step: Aprio’s State and Local Tax (SALT) team can assist your business in addressing state tax obligations relating to NFT transactions.
Schedule a free consultation today to learn more!
The full story:
Ever since Beeple sold the non-fungible toke (NFT) digital work of art entitled “Everydays: the First 5000 Days” for $69 million at auction in March 2021, sales of NFTs have exploded. According to a recent article in The Guardian, sales of NFTs reached $40 billion in 2021 and have already exceeded $42 billion in 2022. Although, most recent sales in June 2022 represented a 12-month low at just over $1 billion.
What is an NFT?
For those that may be unfamiliar, NFTs are tokens that can be used to represent ownership of unique items. Tokens are digital units supported by a blockchain, and these tokens use blockchain technology to verify their uniqueness and facilitate transactions. NFTs can only have one official owner at a time, and they are “non-fungible” because they are not capable of being copied, substituted, or subdivided. An NFT can technically contain anything digital, including drawings, animated GIFs, songs, or items in video games.
The digital product revolution
Whenever a new product or service hits the market, one of the first tax issues for sellers is whether this new product or service is subject to sales tax. One notable example has been the digital product revolution. As books, music and videos became available in digital form, states lost billions of dollars in tax revenue since a transaction that used to involve a sale of taxable tangible personal property was no longer provided in a tangible form. As a result, about 30 states have enacted new laws that treat digital products as taxable. However, since NFTs are a new product, it has been unclear how states would treat the sale of NFTs for sales tax purposes. That is, until recently, when Pennsylvania and Washington issued guidance with respect to the taxability of NFTs.
Pennsylvania and Washington guidance
In May 2022, Pennsylvania released an updated sales/use informational booklet which specifically identifies that sales/use tax applies to the sale of NFTs (unless the transfer is otherwise exempt) under the category of “computer hardware, digital products and streaming services.”
On July 1, 2022, Washington published an interim statement on the taxability of NFTs. The statement provides initial guidance on the taxability of certain transactions involving NFTs for both sales tax and Business & Occupations (B&O) Tax, the state’s gross receipts-based tax in lieu of a more common net income-based tax. However, the statement notes that not all potential scenarios involving NFTs are addressed and that taxpayers are encouraged to request a binding letter ruling to address specific tax obligations.
Under the guidance, where the object of the transaction is the sale of the NFT itself, the sale is likely to be treated as the sale of a digital product (i.e., a digital code) that is taxable as a retail sale. In addition, the seller will also be subject to the B&O tax under the retailing classification as measured by the gross proceeds of the sale.
Of particular importance in determining the taxability of NFT sales is where the sale is sourced (i.e., which state’s tax rules apply to the transaction). This can be a difficult issue to navigate if the seller does not obtain appropriate information about the purchaser to make that determination.
When a sale does not occur at the business location of the seller, it is typically sourced to where the “receipt” by the purchaser occurs (i.e., shipping address). For digital products/codes, since they are not shipped, the “receipt” is viewed as taking possession of making first use (whichever occurs first). However, when an NFT is sold, the seller may have no idea where the purchaser takes “receipt” of the NFT. In those cases, it may be possible to use an address of the purchaser that the seller maintains in the ordinary course of business.
The guidance provides the following example:
- Facts: Zoe lives in Friday Harbor, Washington. Zoe creates highly coveted puffin NFTs, Peculiar Puffins, which are marketed for sale through an online NFT marketplace. Zoe sells a Peculiar Puffin NFT, which provides ownership of a digital code to Norika who resides in Seattle, Washington. Zoe obtains and maintains business records for Norika, including Norika’s address in Seattle, Washington.
- Result: Zoe sold a digital code (which grants access to a digital image) to an end consumer (Norika). The sale is subject to retail sales tax and retailing B&O tax. While Zoe does not know where Norika first received the NFT, the sale is sourced to Seattle since that is address maintained by Zoe in her business records. Zoe is subject to retailing B&O tax and must collect retail sales tax from Norika at the combined state and local rate for Seattle. The sale is deemed to have occurred at the time the NFT transfer from Zoe to Norika was recorded to the blockchain.
The bottom line
Many unanswered questions remain. Will Pennsylvania and Washington seek to collect sales tax on NFT transactions that occurred before the guidance was issued? Will other states follow Pennsylvania’s and Washington’s lead? How will NFTs be treated for state income tax purposes?
Aprio’s SALT team can assist your business in addressing its state tax obligations for NFT transactions, including obtaining a private ruling on your behalf. 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.
This article was featured in the July 2022 SALT newsletter.
 Prior to this guidance, it could certainly be argued that NFTs should be taxable as digital products even in the absence of specific guidance.
 Pennsylvania Dept. of Revenue, Retailer’s Information Rev-717(SU), 05-22
 Interim Statement Regarding the Taxability of Non-Fungible Tokens (NFTs), 07/01/2022
 The sales tax is collected from the purchase by the seller, whereas the Business and Occupations tax is paid directly by the seller.
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.
About the Author
Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.