2004 Web and Downloadable Games White Paper 

IGDA Online Games SIG 

According to the California Legislative Counsel 

s Office, the following states, plus the District of 

Columbia, participate as voting members (implementing states) in the SSTP: Alabama, Arkansas, 

District of Columbia, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, 

Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Nevada, North Carolina, North 

Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, 

Texas, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.  

The following states do not have a sales tax and would not participate: Alaska, Delaware, 

Montana, New Hampshire, and Oregon. One of the components of the act states that for 

nexus/state taxation purposes 

any downloaded service is to be taxed by the state/locality where 

the end user's customer's billing address is located

. It is easy for the states to expand this theory 

so that the service fees paid for PC online gaming are taxable in the state where the player is 

residing. 

(Brazil) Though there is no exact opinion on this issue it can be inferred by The Supreme Court of 

Brazil decision entitled  Extraordinary Appeal No. 176.626/SP" as well as the State of Rio de 

Janeiro decree 27.307/2000 that ICMS (Value added Tax on Sales and Services) is not imposed 

on download operations. Yet even with these decrees, Supplementary Law 87/96 can be 

interpreted that the computer where the software is downloaded can meet the definition of 

establishment.

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  As with the United States, A specific Decree issued by the Supreme Court is 

needed to resolve this issue.  

3. 

New US Tax Legislation 

The Jobs and Growth Tax Relief Reconciliation Act of 2003 included an important change 

regarding computer software. In the past the IRS has let businesses deduct the full cost of tangible 

assets up to $24,000 as an expense. The new law changes that to $100,000 and more 

importantly, for the first time Congress included Computer Software. In addition to the $100,000 

deduction, purchases in excess of $100,000 qualified for 50 percent bonus depreciation. The 

remaining 50 percent is then depreciated as usual. All of these changes are scheduled to continue 

for 2004 and 2005.  

4. 

Taxes on the Wireless Market 

In the wireless market, once again the legal issue of nexus arises. Individuals are paying for 

services. One of the services can be downloading and playing games. This service could either be 

bundled or subscribed to separately. The EU will be treating these services similarly as it does for 

downloaded software (see above). 

The U.S. Federal government has enacted the U.S. Federal Mobile Telecommunications Sourcing 

Act. This act defines who has the right to tax services associated with mobile telecommunications. 

In brief, the address of the primary customer is what dictates who can tax the services provided. It 

is inconsequential if the services are subscribed to individually or bundled. As of this date, all states 

and the District of Columbia (except for Montana) have adopted this act and the sourcing 

definitions. There is some curious confusion in some of these states that have adopted this act 

though. Some states have determined that digitally downloaded software is not taxable in their 

state. Therefore, these states have the legal right to tax that income flow but have chosen not to do 

so as of today. 

The game developer must determine if they want to have the right to download software directly to 

mobile telecommunications hardware or to license the software to a third party and get royalty 

payments. If downloading the software directly, the game company is responsible for the 

compliance costs of tracking the transaction, charging the correct tax rate and filing in multiple 

states. If the game company decides to license the product to a third party and just get royalty 

payments, the company may be liable in certain states based on the economic benefit rule. Either 

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 See also article 127, paragraph 1 of the Brazilian Tax Code 

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