This Game Developer Had to Pay $23M After Misreporting Taxes – Here’s How to Avoid The Same Fate

In 2023, Epic Games’ finance team got a call from Tokyo’s Tax Bureau. They just discovered that between 2018 and 2020, the company failed to declare its income from microtransactions in Fortnite in Japan. 

They fined Epic and made them pay the consumption tax (AKA sales tax/VAT) retroactively – a total of $23 million.

So, while the subject of sales tax may not inspire mobile gaming executives to jump out of bed each morning, failing to comply with sales tax requirements will certainly keep them up at night.  

With that said, what does a mobile gaming leader with direct-to-consumer (DTC) ambitions need to know about staying sales tax compliant – and avoiding a hair-raising phone call from a foreign tax authority?

First, a little context

Before jumping into our key insights, it’s worth explaining when exactly tax on digital goods becomes a responsibility for mobile game publishers. 

Apple and Google handle this on your behalf when you sell in-game items within their payment ecosystems – in return they take 30% of your margins.

But the moment you begin selling to players on web stores, outside of the Apple or Google ecosystem, you take on full responsibility for VAT/sales tax compliance. 

It’s a massive headache, but the juice is worth the squeeze, with publishers such as Playtika earning 25% of their total revenue from direct-to-consumer sales. 

How to Stay Sales Tax Compliant

To stay sales-tax compliant, there’s a long list of responsibilities and processes you need to follow:

1. Understand Your Global Tax Obligations 

Start by researching regional tax laws on digital goods wherever you have customers. Tax laws can vary significantly from one region to another. For example: 

1. The U.S state of Delaware has no sales tax at all
2. Some states, like Tennessee, have digital sales tax rates of up to 9.75%
3. In Australia, there is an annual sales threshold of AUD 75,000. Businesses below this threshold are not required to register for Goods and Services Taxes.

These are but 3 examples of unique governance, but many more exist – and the burden of understanding due process and proper reporting rests on you, the seller.

2. Set up entities in relevant jurisdictions

In many countries, you have to establish entities and set up local bank accounts to register your business on the ground. 

• In the U.S. you have to establish entities in approximately 27 different states. This can take months and costs a lot of money (lawyers, bank accounts connected to the entity).

• In the EU, you just need to register one local entity.  

• In Japan, foreign businesses must establish a local entity and register for consumption tax if their taxable sales exceed JPY 10 million in the previous fiscal year. Additionally, the business must appoint a local representative to handle tax matters.

3. Register with the tax authorities

You have to register with the tax authorities in almost every state or country you’re selling in. Yes, you read that right – whether you’re selling to players in the U.S, Japan, Germany or almost any other country, you need to register with the local tax authorities. Lawyers and accountants will be needed, which can be costly.

4. Calculate the right taxes for every transaction

For every transaction, your game has to calculate and show users how much VAT/sales tax they owe and will be charged. In some countries, like the U.S, there are multiple layers of sales tax you could be liable to pay on digital goods, depending on the location of the buyer. The tax tiers include federal, state, county, city, and a category defined as ‘special’. 

For example, if a player in Dallas, Texas, buys an item in your web store for $10 USD, you’d have to calculate:

• State: 6.25% ($0.65)

• City: 1% ($0.1)

• Special (Dallas Mta Transit): 1% ($0.1)

To accurately calculate the correct amount of tax for each sale and reduce the risk of human error, publishers should use a tax automation service such as Avalara, or use the services of a Merchant of Record such as Appcharge.

5. Implement Accurate Tax Collection

You as the seller are required to charge and collect the tax payment from players for every transaction. A couple key points here:

• You have to keep the collected tax payment separate in a sub account, in the currency it was received in. 
• You need to send the buyer a receipt, invoice, or payment request. 

6. Report tax promptly and accurately 

Every month or quarter, you have to file tax reports in all the relevant tax authorities whose regions you’ve done business in – even in areas with 0% sales tax. To do this, you need to build a system that pulls transactional data from your game, and exports it to a spreadsheet with a detailed breakdown that includes, for each transaction: 

• The user’s specific location
• The local currency
• The amount of sales tax charged

It’s a huge amount of data to manage, and it has to be accurate – so make sure you meticulously maintain your records to avoid potential penalties. 

Note that you’ll need to submit this data in different formats in various countries and states, for example in Saudi Arabia you will have to issue the invoices in Arabic, and in South Korea you will have to share all the invoice details (which is not required in the US).   

Tax Compliance For DTC Sales: A Worthwhile Headache

With great opportunities come great responsibilities. To recap, in order to sell digital goods globally via your web store while avoiding serious penalties (or even worse – jail time), you need to:

• Keep track of complicated, often changing global sales tax/VAT regulations
• Establish dozens of local entities 
• Register with local tax authorities
• Calculate the correct sales tax for every transaction
• Efficiently collect the sales tax from every transaction 
• File numerous tax reports every month or quarter 

This doesn’t just represent a major operational burden – but also a financial one. You need lawyers and accountants to help with the process, in addition to a team of finance specialists to run this whole operation. It’s a lot, but it’s doable if you have the resources – and the rewards are certainly worth it.

Doing All Of This At Scale Is What We Do At Appcharge

If it sounds overwhelming to do it alone with in-house resources, you can and probably should consider using a Merchant of Record like Appcharge. We do this at scale for some of the biggest mobile game publishers in the world and we’d be happy to help you too.

As a comprehensive solution for direct-to-consumer sales for mobile game publishers, we offer full Merchant of Record services – meaning we take the entire tax compliance process off your plate. 

Our team manages entity creation, tax authority registrations, calculations, collections, filings, and everything in between to let you focus on growing your web store revenue.