Paying Your State Taxes After Crowdfunding

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Crowdfunding has taken the world by storm, but it isn’t a source of tax-free revenues for individuals or businesses – unless you’re tax-exempt, that is. States are recognizing that they are missing out on a potential revenue stream by not regulating crowdfunding. In the State of Washington, anyone who makes more than $12k is required to obtain a business license and file business tax returns.

Why is this important to know? For crowdfunders in Washington State, they would then be required to charge sales tax on all rewards that are sent to in-state backers. Then there are business and occupation taxes that must be paid based on the rewards that are given. All it takes is one $25 book to trigger this tax.

What is the law on Washington’s B&O tax? Because there are no income taxes in the state, the B&O tax has no deductions. It’s based on the gross income from your activities. This means there would be no deductions for materials, labor, or even your taxes. Your deductions might give you a negative net income, but you’ll still be required to pay this tax on your gross receipts.

Why Are States Tracking Washington’s Results?

The rest of the nation wants to see what kind of revenues Washington State can generate with their crowdfunding tax requirements. There are several states where laws are under development that will coincide with legislation that is expected on a national level. It is very possible that the $12k someone would receive from crowdfunding could wind up being half gone because of taxes by the end of 2015 for people in some states.

The only real piece of good news is this: if a backer is out of your state, then you will probably not be required to charge that person sales tax on a reward that is given. That person may need to pay their own local sales tax, but it would not be the duty of you, the out-of-state business owner, to collect that tax.

The days of unregulated crowdfunding are growing near. As the number of platforms continue to expand, the desire of the states to tax this money is going to expand with it. Find out what your state may be doing to tax this industry and make sure that any money you raise is compliant with local laws.