Crowdfunding Contributions and State Sales and Use Taxes

By Justin Gruba, CPA, MSA, Seattle; Lindsay McAfee, J.D., Washington; and Bradley H. Ashby, J.D., CPA, Washington

Editor: Mary Van Leuven, J.D., LL.M.

State & Local Taxes

More than 8 million people have funded more than 80,000 projects with pledges of approximately $1.6 billion through the popular crowdfunding website Kickstarter ( since its launch in April 2009. Millions of dollars have been contributed to fund thousands of projects through other crowdfunding sites that are attempting to create their own niches.

Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically through the internet. Generally, three parties are involved in crowdfunding: a project initiator that is seeking project funding, contributors that fund the projects, and a moderator, usually a website, that brings the initiator and contributors together. Besides Kickstarter, crowdfunding moderators include Indiegogo ( and other sites that host forums for project initiators to present their projects or ventures and for contributors to make pledges to the initiators' causes.

Crowdfunding campaigns fund a broad range of projects, from producing a movie, game, product, or new technology to supporting a charitable cause. Among projects raising the highest pledge totals have been an affordable 3-D printer, a card game called Exploding Kittens, and a campaign to bring the educational television series Reading Rainbow back to over 10,000 classrooms.

Crowdfunding generally operates, or will operate, under one of two models to entice contributors to support a project: rewards-based funding and equity-based funding. Rewards-based campaigns provide incentives to contributors determined by the level of their contributions. Rewards include simple thank-you notes, a T-shirt or other product upon which the campaign is based, or access to a live event. The only limitation on what can be offered as a reward is the initiators' imagination—and the ability to follow through on the promise.

On the other hand, equity-based campaigns provide contributors with ownership stakes in the startup in return for a monetary contribution. As of this writing, the SEC had not yet issued final regulations under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106, which authorizes wider availability of equity crowdfunding by exempting from certain registration requirements and investor restrictions private issuances through internet "funding portals" of certain small startup companies. Despite the lack of final regulations, a number of companies are offering equity crowdfunding, although neither Kickstarter nor Indiegogo currently offers equity-based crowdfunding.

Most campaigns are set up with a fixed funding goal in which contributions are returned to the contributors if the funding goal is not met. Alternatively, some crowdfunding platforms permit campaigns to be set up with a flexible funding goal that allows the initiators to keep funds even if the funding goal is not met.

Crowdfunding's use is growing exponentially, and a multitude of tax issues need to be considered. To date, however, only one state has issued guidance on the taxability of crowdfunding contributions. The Washington State Department of Revenue recently issued guidance on its website addressing state tax implications of crowdfunding contributions (see "Tax Topics: Crowdfunding"). While crowdfunding contributions raise other federal and state tax issues (including Washington's business and occupation tax and other gross receipts taxes), the focus of this item is on state sales and use taxes and the implications of Washington's recent guidance.

Sales and Use Taxes: Nexus

The threshold question for whether a project initiator is responsible for collecting sales or use taxes is whether the state has jurisdiction over the initiator to require collection and remittance. For a state to have jurisdiction over an out-of-state seller, the seller must meet the state's statutory requirements for "doing business" or being a "vendor" in the state, and the out-of-state seller's activities must have a "substantial nexus" with the taxing state. The U.S. Supreme Court in Quill v. North Dakota, 504 U.S. 298 (1992), ruledthat "substantial nexus" for sales and use tax collection means that a seller has "physical presence" in the state, which requires more than a connection through the U.S. mail or common carrier within the state. Many project initiators may be individuals or small startups with a physical presence in one or a few states; however, they may be deemed to have substantial nexus in additional states through the crowdfunding moderator.

As states continue to grapple with the growing e-commerce industry, as of this writing, approximately 15 states have enacted "click-through nexus" provisions to expand their reach to certain out-of-state sellers. These provisions generally create presumptions of nexus if the out-of-state seller pays a commission to an in-state person who, through an internet link or otherwise, refers customers to the out-of-state seller, if the referral results in a sale and the seller's annual sales from the referrals reach a certain dollar threshold. Since the crowdfunding moderator is receiving a fee for providing an internet link for contributors to make contributions, these click-through nexus provisions may create nexus for the project initiator if the moderator has substantial nexus in a click-through nexus state.

Sales and Use Tax: Taxability

In general, most states impose sales tax on the retail sale of tangible personal property and certain enumerated services. In Washington and several other states, the electronic delivery of digital products such as videos, music, or books—which are often used as crowdfunding contribution rewards—is subject to retail sales tax. To the extent that a project initiator is providing a tangible reward in exchange for a contribution, some states will likely consider this exchange to be a retail sale subject to sales tax, unless the particular reward is exempt or otherwise nontaxable in that state.

On the other hand, some states may consider the project initiator to be making a taxable use of the tangible rewards as a promotional item and may require the project initiator to remit use tax on the rewards. According to Washington's publication, the exchange of a tangible reward for a contribution is considered a taxable retail sale; however, rewards such as a thank-you note or listing the contributor's name online as a supporter are not taxable, and, therefore, the related contributions are considered donations.

Sales and Use Tax: Tax Base

What is the taxable base of the reward? In its recent publication, Washington takes the position that the minimum contribution amount at each level is considered to be the value of the item or service, and that any amounts above the minimum are donations not subject to tax. For example, an initiator offers a special advance DVD copy of the movie it is producing to contributors who provide $25 to the project. If a contributor provides $35 to the project, $25 is subject to tax since it is considered a sale of tangible personal property; the additional $10 is considered a donation that is not subject to tax. Further, if a reward level provides a mix of goods subject to retail sales tax and nontaxable services, Washington will subject the entire minimum donation amount to retail sales tax unless the component subject to retail sales tax is less than 10% of the entire reward's value. Project initiators may be able to support a lower retail tax base in Washington or other states by specifying the dollar value of each reward. Further, Washington cautions project initiators to state that, when appropriate, all pledged amounts include sales tax—otherwise, the state will assume that the pledged amount does not include sales tax and will measure the tax based upon the full value of the minimum donation.

Sales and Use Tax: Timing

While it may be clear that there is a taxable transaction, the next issue is timing: When should the tax be reported? When a project initiator works toward a fixed funding goal, the funds do not vest with the project initiator unless the goal is met. In other words, the retail sale does not take place until the funding goal is met. Washington requires taxes to be reported when the project is fully funded.

While some states may follow Washington's lead, it is possible that other states may take a more aggressive approach and treat these contributions as similar to a sale and return, requiring taxes to be reported at the time of the sale and allowing a subsequent credit if the funding does not vest. Further, since the Washington publication appears to only address timing for fixed funding campaigns, if funds are received contemporaneously through a flexible funding campaign, it is unclear whether the state would still postpone the reporting requirement until funding is complete.


Crowdfunding is a new and growing approach to financing various types of undertakings, the footprint of which is expanding across different sizes and types of individual projects and businesses. Although millions, if not billions, of dollars will exchange hands through these platforms this year, states have largely remained silent in providing guidance to hosts, initiators, and contributors regarding the tax reporting requirements relating to these rewards-based contributions. While Washington state has provided guidance on certain tax issues involved in crowdfunding, it is likely that other states will take different approaches. Project initiators should be aware of the potential sales and use tax exposure created by their presence and their moderator's presence; this exposure could create challenges for a project to overcome during its early stages.


Mary Van Leuven is director, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or

Unless otherwise noted, contributors are members of or associated with KPMG LLP.

This column represents the views of the authors only and does not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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