New types of transactions often challenge existing rules designed without such transactions in mind. The use of virtual currency, such as bitcoin, may be another example. The IRS has proclaimed that convertible virtual currency should be treated as property for federal tax purposes (rather than as a foreign currency) (see Notice 2014-21).
If states take a similar approach (which seems likely), would obtaining bitcoin from someone for cash be subject to sales or use tax? It seems like a "sale" of property. However, virtual currency is intangible and most states (perhaps all) would not include it in the sales tax base (today).
A few states have issued statements or guidance on virtual currency. For example, in June 2014, the California Board of Equalization issued a special notice - Accepting Virtual Currency as a Payment Method. The BOE points out that "The measure of tax is the total amount of the sale or lease, whether received in money or other consideration." Records should be kept that show the amount charged. For example, to show the price charged for a meal, a restaurant should keep a copy of the menu. The BOE notes that it does not accept payment in virtual currency. There was no mention of sales tax on virtual currency, but California would not tax it as the state has mostly a tangible personal property base.
In September 2014, the Missouri Department of Revenue issued LR 7411 (9/12/14). Here, Taxpayer (T) provides ATMs that enable customers to obtain bitcoin. Customers insert paper currency and obtain bitcoin on their electronic wallet. T is not a bitcoin exchanger and does not produce bitcoin. The question presented to the DOR was whether T is required to collect sales tax when it transfers bitcoin to customers. The DOR said no because the item transferred it intangible and not subject to sales tax.
And on December 5, 2014, the New York State Dept. of Revenue and Taxation issued TSB-M-14(5), (7)I, 17(s) covering sales tax and income tax. For sales tax, the ruling explains that use of virtual currency to pay for purchases results in a barter transactions (following the property approach of the IRS notice).
Per the NY ruling: "A barter transaction is actually comprised of two separate sale transactions. Each party to a barter transaction gives something of value to the other party in order to receive something of value in return. In a barter transaction, sales or use tax (sales tax) is due from each party based on the value of the property or services given in trade if what is received in exchange is subject to sales tax. Services given in trade are taxed based upon a party’s normal charge for the service it provides."
An example is provided of a home décor vendor accepting virtual currency from customers. As a barter transaction, this means that the customer receiving the décor items owes sales tax (to be collected by the vendor). The transaction amount is based on the value of the virtual currency at the time.The vendor received virtual currency, but no sales tax is owed because it is intangible and not subject to sales tax in New York. The vendor is to record the sale based on its value in US dollars and remit the sales tax in US dollars. No guidance is given as to what exchange table to use to determine the value of the virtual currency in US dollars at the time of the transaction.
If a state imposed sales tax on virtual currency or it fell within an existing definition of taxable digital goods or a taxable intangible, there could be double taxation because the merchant is really accepting the virtual currency as a cash equivalent. Returning to the home décor example above, each party would owe sales tax on the exchange if the sales tax base include virtual currency. And, if the vendor converts the virtual currency to cash (that is, sold it to someone for cash), sales tax would be charged on that transaction too. That seems a bit odd, but appropriate unless an exception is provided for the cash to virtual currency conversion. Australia has proposed that double taxation results with its goods and services tax (VAT).
As states continue to broaden and modernize their sales tax base for our modern world (the one where some tangible goods are replaced with digital ones), consideration will need to be given as to whether the exchange of virtual currency for cash should be exempted, at least for merchants.
What do you think?
For background on virtual currency and its taxation and regulation, see http://www.21stcenturytaxation.com/Virtual_Currency___Tax.html.
Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:
- With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017
- Would Broader Sales Tax Base Deliver Simplification - and Savings?
- Trailing Nexus - When Does It End?