2004 Web and Downloadable Games White Paper 

IGDA Online Games SIG 

exist. Notwithstanding the OECD, the United Kingdom has statutorily determined that a server 

located in the United Kingdom will not create nexus; thereby a nonresident United Kingdom 

gaming company who has their servers located in the UK will not be taxed (see exception 

regarding VAT) in the UK. Italy has determined that if you use a smart server, you have created a 

physical presence in Italy and that Italy has the right to tax your income stream. The German 

Federal Tax Court in April 2002 took under consideration whether a computer server can constitute 

a permanent establishment to which income should be attributed for taxing purposes. As of the 

date this is being written, the Court has not published its determination. Australia has decreed that 

a server is a physical establishment. Therefore, if your server is in Australia your income flow will 

be taxed (this may explain why most Australian entities have their servers located in California). 

The United States, for federal purposes, has not issued any guidance on this matter. In the multi 

state arena, the states seem to be agreeing with the Italian position. Besides the issue of 

compliance with many taxing jurisdictions and its corresponding costs, the Pandora 

s Box of how to 

allocate the income between the shrink wrapped product and the possible Internet use is mind 

numbing. 

2. 

Indirect Taxation  

(EU) Digitally downloading software is becoming an acceptable means of distribution. Countries 

have begun to defend their bricks and mortar businesses. In May of 2002, the European Union 

(EU) adopted a resolution that as of July 2003, digitally purchased and downloaded software will 

be subject to VAT (Value Added Tax). The issue of whether a company is a resident and 

physically located in an EU country is no longer pertinent. All digitally downloaded software will be 

liable for VAT tax. The tax rate is dependent on the location where the software was downloaded. 

The EU will require companies that are not located in the EU, to register for collecting VAT in an 

EU country of their choice. The additional compliance costs of registering in the EU, purchasing 

software that will track where the game is downloaded, and then computing the appropriate VAT 

tax of that locale, will now need to be included in projected expenses. As of November 1st, 2003 

Belgium is the only country that has issued guidance and regulations in regards to nonresident 

companies registering for VAT. 

(US) The United States Congress is currently discussing if it will take a position in regards to 

digitally downloaded software. There are two bills in place: the first bill sponsored by Reps. Ernest 

Istook (R Okla.) and William Delahunt (D Mass.) on Sept. 25, 2003 unveiled long awaited 

legislation (H.R. 3184) that would give states the right to require retailers to collect sales and use 

taxes on remote transactions if they simplify their sales tax systems.  Many states have not yet 

decided if downloading digital software is a taxable event in that state. 

On October 1, 2003 Rep Bob Goodlatte (R VA), Rep Rick Boucher D VA), and others, introduced 

HR 3220, the "Business Activity Tax Simplification Act of 2003", a bill that would limit states 

 ability 

to impose business activity taxes (BATs). It would require that a business have a physical 

presence in the taxing jurisdiction to be subject to a BAT. The Bill was referred to the House 

Judiciary Committee. The Department of Treasury regulations that discuss foreign source income 

and foreign tax credits have taken a similar position as the EU.  

On October 15, 2003 Senator Mike Enzi (R WY), Senator Byron Dorgan (D ND) and others 

introduced S 1736, titled the "Streamlined Sales and Use Tax Act", a bill to authorize state and 

local taxing entities to collect taxes from out of state remote sellers, including internet retailers. Sen. 

Enzi and Sen. Dorgan also spoke in support of this bill in the Senate. Also on October 15, Senator 

Ron Wyden (D OR) went to the Senate floor to warn that a version of the Internet Tax 

Nondiscrimination Act (INDA) being advanced by state and local governments would give state 

and local governments "explicit permission to tax what Internet users do once they get on line", 

including sending e mail. 

The State Sales Tax Project (SSTP) has determined that downloaded digital software is a taxable 

event. As of October 20, 2003 the Streamlined Sales and Use Tax Agreement (SSUTA) is now in 

effect because more than 10 states with 20% of the total population of all states imposing a state 

sales tax have enacted the conforming legislation that complies with the Agreement.  

Page 40 of 93