2004 Web and Downloadable Games White Paper 

IGDA Online Games SIG 

way, the cost of compliance must now be taken into consideration in projected expenses of game 

development. 

5. 

IP and Taxes 

Utilization of a third party publisher may no longer shield the game developer company from U.S. 

multi state taxation. It has been an ongoing battle as to who owns the intellectual property rights of 

a game. Developers have increasingly wanted to keep the IP rights. Certain states have 

determined that the use of IP rights in their state makes any economic benefit derived from those 

rights as taxable in that state. Therefore, developers now must weigh maintaining their IP rights 

against compliance costs of having to file and pay taxes in those states. 

6. 

Tax Treaties 

In June 2003, Mexico determined and is taking the position that payments for acquisition of 

software are royalties and therefore should be subject to a 10 percent withholding tax. This stance 

could bring the country into conflict with double taxation treaty partners including the United States. 

E. 

Volunteers of MMOGs 

There are two US class action lawsuits pending against AOL and EA claiming that volunteers of MMOGs 

are really employees and should be paid as such. The first case of 

Hallisey and Williams v. AOL, Inc

. was 

filed in May 1999 in US District Court Southern District of New York and the other was filed in September 

2000 in the US District Court District of Colorado entitled 

Katherine Reab, et. al. v. Electronic Arts 

Incorporated and Origin Systems Incorporated civil action 00B1839

. Until both these cases are resolved, 

it is unclear if by setting up  volunteer  communities in an MMOG, that the game developer may have 

unwittingly incurred substantial liability in back pay, payroll taxes and other possible fringe benefits.  

It was reported that the U.S. Department of Labor had investigated and dropped the allegations against 

AOL in regards to Hallisey and Williams' case. As of November 5, 2003, this has neither been confirmed 

nor denied by the US Department of Labor.  

A few years ago, a multiplayer game provider also received a related ruling from the IRS. One of the 

game provider 

s offsite "GameMasters" filed taxes claiming that he should be treated as an employee and 

not as a contractor.  The IRS investigated, but agreed with the game provider that the individual was 

correctly classified as a contractor, and not an employee. 

F. 

Summary 

As developers form and constantly re evaluate their modes of operation, they should always consider the 

following things: 

A new game developer with no credibility or past successful games, may need to consider taking lower 

economics with their first game deal to establish credibility and recognition in the marketplace.  

Web games and Downloadable games are similar but each niche has unique considerations which 

should be addressed. 

For developers, some business models available in this space stand on their own (primary models) and 

some work best in conjunction with other models (secondary models). 

Developers should be wary of aggressively pursuing business models that put them in competition with 

their partners. 

Financial models are flexible and primarily revolve around risk. The more risk a developer is willing to 

take should result in better revenue streams if the product is successful. 

Selling IP can be very beneficial short term, but has many long term issues which should be 

considered.  

Partners who take the time to understand each other 

s businesses, are better able to provide maximum 

value and benefit to each other. 

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