COMMENT: Your very real tax obligations in the virtual world

by Alex Baulf, senior director global indirect tax at Avalara

With big hitters such as Gucci and Selfridges leading the way, the metaverse is rapidly becoming a popular new commerce channel for retailers worldwide. 

According to a recent survey, 86% of retail businesses across the UK, US and India, considers the metaverse as a priority channel, and nearly a third (31%) have plans to prioritise the virtual world this year.

Retailers have a shiny new toy to play with, which boasts exciting possibilities. But, if the only certainties in life are death and taxes, it stands to reason that tax obligations will also follow you to the metaverse – and retailers need to consider carefully how tax laws will apply to these new commerce channels.

Governments around the world are beginning to consider how to tax activities that take place within the metaverse. However, much like the constantly expanding and changing virtual world itself, this is a work in progress. While the debate continues, retailers must do their best to navigate the virtual tax landscape themselves.

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What taxes are we talking about here?

One issue which makes it so complex is the classification of virtual currencies, such as Bitcoin and other cryptocurrencies. The UK government has already taken steps to regulate these currencies, classifying them as assets rather than currency for tax purposes. 

This means that any gains made from trading virtual currencies are subject to capital gains tax.

In addition to virtual currencies, other forms of income generated within the metaverse may also be subject to taxation. For example, income earned from activities such as virtual property development, the sale of virtual goods or services, and even in-game advertising may be subject to income tax.

Another potential area of taxation is value-added tax (VAT), which could be levied on virtual goods and services sold within the metaverse. However, this ultimately depends on how tax authorities classify virtual goods and services, and whether they are considered to be digital services for VAT purposes.

It sounds intimating, and possibly even off-putting, for retailers to dip their metaphorical toes into the virtual world. But for those that do, there are huge opportunities up for grabs. 

According to McKinsey, by 2030 ecommerce revenue in the metaverse could total between $2 – 2.6 trillion.

Breaking it down and thinking about virtual transactions with the same principles in mind as you would for any other transaction can really help see the wood from the Minecraft trees. Below, we look at four core considerations for any retailers planning their meta-commerce move. 

• Real locations still matter. Digital services are taxed where the customer is and, as traditional payment methods might not be used in the metaverse, you might not actually have the data to know where your customer is, which could result in increased risk of late registrations, tax assessments and penalties, as well as additional scrutiny from overseas tax authorities.

• Who’s liable for the tax? There is a new level of intermediaries involved within the metaverse(s) – the company which runs the ecommerce platform may well be different to the company selling on it. Keep in mind who is providing the services as this is usually who is liable to pay the tax. However, some countries have introduced special platform, marketplace and intermediary rules that can make the intermediaries the deemed seller for VAT purposes.

• Do any existing laws currently help? There are big questions about whether the current tax laws are still fit for purpose and lots of regulatory bodies are taking matters into their own hands in a search for clarity. For example, Germany has said parcels of land in SecondLife aren’t subject to tax but that is at odds with normal practise. Tax authorities will need the right tools to effectively levy and collect tax arising from meta transactions or risk significant amounts falling into this virtual tax gap. This ‘gap’ is currently estimated to be €93 billion in the EU alone. As global economics battle with recessions, this amount of capital simply cannot be missing from government revenue.

• What counts as the metaverse anyway? Just because a sale happens in the metaverse doesn’t mean the product isn’t real and therefore needs taxing as such. Make sure you’ve got your tax obligations set up to meet the item being fulfilled, not just the environment in which it’s being sold. Just because a real pair of Nike trainers are bought in Nikeland doesn’t mean they don’t carry the same taxation requirements as those bought online from nike.com. VAT will likely be due based on the ship-to destination, and sellers may have a requirement to register for VAT in that destination country. There are simplifications like the EU’s IOSS registration that may help.

The metaverse is catapulting the retail industry into a new era of shopping – one that has the potential to provide limitless opportunities for the future, taking retailers into new territory and inserting their brand into virtually any home. 

As virtual worlds become more integrated into our daily lives, it is important that tax authorities keep pace with these developments and ensure that tax laws are updated to reflect the changing nature of economic activity within the metaverse.

Leaning on others can go a long way to lightening the complex administrative burden of tax in this brave new world.

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