Chasing high scores and low taxes – online gaming tax considerations for Washington State

Digital distribution has made it easier than ever for video game publishers to reach customers. However, in turn, it often can lead to incorrect revenue sourcing for the Washington Business and Occupation (“B&O”) tax.

Console marketplaces and mobile app stores sit between publishers and end users in ways that blur the line between a “sale” and a “license” often causing ambiguity for tax classification purposes. However, regardless of whether a publisher’s receipts are treated as royalties or retail sales of digital goods, Washington sourcing is often more closely tied to where the end user is located than where the platform is located. And that gap—between platform address and end-user location – is where overpayments and underpayments quietly accumulate.

Why this matters (even if you’ve “always done it this way”)

Washington’s B&O tax is a gross receipts tax, and classification and sourcing decisions can have an outsized impact when a publisher has meaningful revenue. For publishers with customers nationwide (or worldwide), the difference between sourcing receipts based on end-user geography versus a single “platform” location can be material.

Washington also has specific sourcing frameworks depending on whether receipts are treated as apportionable royalties or retail sales. When a publisher’s process shortcuts those frameworks—by defaulting to the gaming platform’s headquarters, the contracting entity’s address, or the location of a payment processor – Washington receipts can become distorted.

If the receipts are royalties: WAC 458-20-19403 and “marketing use”

When a publisher’s arrangement with a platform is treated as a license of intangible property (for example, a license to distribute a game), the receipts may be analyzed under Washington’s royalty attribution rules in WAC 458-20-19403.

At a high level, the rule is built around a cascading concept that starts with where the customer uses the intangible property, including the ability to use a reasonable method to proportionally attribute use across states when the intangible is used in multiple jurisdictions.

The Washington Department of Revenue’s royalty sourcing rules further frame “use” of intangibles into categories, including marketing use, which is described as intangible property used for marketing/displaying/selling and includes items like copyrights.