What is crowdfunding?

Crowdfunding is a way to raise money for a certain project. This process usually takes place online and can reach a large group of people. Individuals or small businesses can set financial goals for each project. Generally, the fundraising goal must be met in order to collect any money.

Who participates in crowdfunding?

Crowdfunding participants include:

  • Host – The host is usually a website or online platform. This site is where individuals and companies can place and describe the project. The host receives the donated money from backers. Once the project meets its financial goal, the host keeps some of the money for providing online services. Then, the rest of the money is given to the project creators. If the project doesn’t meet its financial goal, some hosts require that the project creators return the money to the backers. Other hosts give project creators whatever money was raised.
  • Project creator – The project creators are the people who create the project. A project creator can be an individual or a business. The project creator post the project ideas on the host website and asks backers for money. Project creators set the goal, and a deadline. They may also provide the backers with rewards for funding the project.
  • Backer – A backer is a business or individual who offers money to project creators. This group is usually made up of the general public, friends, family, etc. In exchange for giving money to a project, backers can get rewards from the project creators. These rewards can be anything from a thank you note to books, dinners, tickets, or anything else.

 

What’s an example of crowdfunding?

You are a book author. You want to turn one of your books into a movie so you decide to use crowdfunding to raise money for your project. You decide to reward your backers in the following ways:

  • Backer donates $1: You write the backer a thank you note.
  • Backer donates $5: You write the backer a thank you note and list their name online as a supporter.
  • Backer donates $25: You give the backer a signed copy of your book.
  • Backer donates $100: You invite the backer to a private screening of your movie.
  • Backer donates $250: You invite the backer to a private screening of your movie, and to a cast dinner.
  • Backer donates $500: You invite the backer and two guests to a cast dinner and private screening of your movie. Backer also gets a cameo appearance in the movie.
  • Backer donates $1,000: You buy the backer a plane ticket and movie tickets to see the movie opening in Los Angeles, CA.

 

As the project creator, you are responsible to make sure backers get their rewards.

When do state taxes apply to the donations received from crowd funding?

The project creator needs to report the donations in the reporting period when the project is fully funded. For example, if the project is fully funded in December 2014 and the project creator reports monthly, then you would report the crowdfunding donations received to that point on your December 2014 excise tax return.

Do I have to collect and report sales tax when I use crowdfunding?

Yes, the project creator is required to collect sales tax on donations if you provide retail services (such as meals), digital products or tangible personal property (books, videos, copies of games, etc.) as rewards. You don’t have to collect sales tax on items exempt from sales tax (such as prepackaged food items).

We recommend you state, when appropriate, that all pledged amounts include sales tax. Otherwise, we will assume that the pledged amount does not include sales tax.

What sales tax rate do I use?

The sales tax rate is based upon where the backer receives the goods or retail services. For example, if a backer in Spokane receives taxable, tangible personal property then you would use Spokane’s sales tax rate and location code.

The host is charging me a 7 percent fee for their services. Can I deduct this fee?

No. You must report the full funding amount without deducting this fee. This is part of your gross income. The amount kept by the host is a cost of doing business for the project creator and therefore it cannot be deducted.

I am an individual using crowdfunding to raise money for a personal project. Do I need to register with the Department of Revenue?

If your annual gross income (donation amount and the host fee) from crowdfunding is more than $12,000 then you need to register with DOR. If you are required to collect sales tax on a reward, then you also need to register with DOR. For more registration information, visit http://dor.wa.gov/Content/DoingBusiness/RegisterMyBusiness/.

What tax classification should you use with crowdfunding?

Your Business and Occupation (B&O) tax classification is based on the rewards you give your backers. You need to figure out the tax on each donation you receive. The minimum donation amount at each level is considered to be the value of the item. The amounts above the minimum donation are considered to be donations and are not subject to tax. Contact the Department for a ruling if you think a reward should be valued a different way.

General B&O Tax classification rules:

  • Amounts received for items with no significant value (such as thank you notes, posting a name) aren’t subject to B&O tax.
  • Amounts received as donations (no goods or services provided) aren’t subject to B&O tax or sales tax.
  • Amounts received for providing tangible personal property, digital products and retail services in Washington) are subject to B&O tax under the Retailing classification.
  • Amounts received for providing non-retail services are subject to B&O tax under the Service and Other Activities Classification. Note: If you are a Washington business, your service income (regardless of state boundaries) must be reported on your excise tax return. However, you may be able to apportion some income between Washington and another state or country. You can do this if you meet at least one of the economic nexus standards (in that other state or country).

B&O Tax classification example

You are a book author. You want to turn one of your books into a movie so you decide to use crowdfunding to raise money for your project. You decide to reward your backers in the following ways:

  • Tier 1 - Backer donates $1: You write the backer a thank you note.
  • Tier 2 - Backer donates $5: You write the backer a thank you note and list their name online as a supporter.
  • Tier 3 - Backer donates $25: You give the backer a signed copy of your book.
  • Tier 4 - Backer donates $100: You invite the backer to a private screening of your movie.
  • Tier 5 - Backer donates $250: You invite the backer to a private screening of your movie, and to a cast dinner.
  • Tier 6 - Backer donates $500: You invite the backer and two guests to a private screening of your movie, and to a cast dinner. Backer also gets a cameo movie appearance.
  • Tier 7 - Backer donates $1,000: You buy the backer a plane ticket to the movie opening in Los Angeles, and tickets to attend the opening.

 

In this example, assume the backer is an individual, not a business. The B&O tax classification for the donated amount is:

Donated amount B&O tax classification Why?
Tier 1: $1 Not taxable Insignificant value. More than $1 is considered a donation.
Tier 2: $5 Not taxable Insignificant value. More than $5 is considered a donation.
Tier 3: $25 $25 Retailing Sale of tangible personal property. More than $25 is considered a donation.
Tier 4: $100 $100 Service and Other Private screening of a movie is not a retail transaction. More than $100 is considered a donation.
Tier 5: $250 $250 Retailing This transaction is a mix of retail (the dinner is retail if it’s held in Wash.) and service transactions; the rewards don’t have specific prices. The amount is subject to Retailing B&O tax unless the dinner value is less than 10 percent of the whole award’s value. More than $250 is considered a donation.
Tier 6: $500 $500 Retailing This transaction is a mix of retail (the dinner is retail if it’s held in Wash.) and service transactions; the rewards don’t have specific prices. The amount is subject to Retailing B&O tax unless the dinner value is less than 10 percent of the whole award’s value. More than $500 is considered a donation.
Tier 7: $1000

$1,000 Service and Other

Plane ticket and movie opening tickets are not retail transactions. More than $,1000 is considered a donation.

Questions about reward values or crowdfunding?

Send email to rulingsdor@dor.wa.gov. Or write a letter to:

Department of Revenue
Attn: Taxpayer Information & Education
PO Box 47478
Olympia, WA 98504