Riot games case 909

Decision in Esports Case Suggests Attendance, Not Sales, Can Trigger Tax Obligations

By Dana Stone, Penn Law 3L

With traditional sports leagues suspended, the esports and video game industry is having a moment.  Notwithstanding the economic downturn, the video game industry has seen an increase in revenue during the pandemic as many fans embrace the fast-growing industry.  In fact, in March, video game sales in North America were up 34 percent from those in March 2019.  As video games go from household hobby to professional sports status, video game publishers will aim to capitalize on this surge in popularity through many channels, specifically trade shows and conventions.  A recent case in Washington State highlights a consideration publishers should account for when deciding to attend conventions once large gatherings are permitted to resume. 

Popular video game developer and publisher, Riot Games, Inc. (“Riot”) recently discovered the unforeseen sales tax risk presented by participating in a trade show or convention.  In Riot Games, Inc. v. Washington, BTA Dkt. No. 15-118 (Feb. 11, 2020), the Washington State Board of Tax Appeals (“Board”) upheld the Department of Revenue’s determination that Riot’s participation in a trade convention in Seattle created a sufficient nexus with Washington to trigger payment of the state’s business and occupation (“B&O”) tax. 

Washington imposes a B&O tax on “every person that has a substantial nexus” in the state.  A substantial nexus can be established by a person with a physical presence in Washington, engaging in activities that are “significantly associated with the person’s [or representative’s] ability to establish or maintain a market for its products” in the state.  Such activities include exhibiting at a trade show and performing activities aimed at establishing or maintaining customer relationships.  Since 2016, Washington allowed a trade convention exception in which businesses such as Riot can participate in one trade show per year without establishing a substantial nexus, as long as they do not make sales at the convention.  There’s a catch – to qualify for the exception, the trade convention cannot be open or marketed to the general public.  This means that marketing for the convention must be limited to specific members and invited guests. 

Prior to November 2012, Riot (based in California) did not have any employees or physical place of business in Washington.  Its only direct contact with the state was its attendance at an annual multi-day gaming convention in Seattle.  In August and/or September of 2010, 2011 and 2012, Riot sent several employees to participate at the Penny Arcade Expo (“PAX”).  Industry insiders and the general public gather each year at PAX to explore exhibitor booths, participate or watch gaming tournaments and try out new games.  Open to the public, approximately 70,000 people attended PAX during the years in question.  Riot attended PAX to promote League of Legends (Riot’s popular multiplayer online video game) and engage with the general community.  During 2010 and 2011, Riot made no direct sales at the convention.  Rather, at its booth, Riot handed out swag and representatives played games with visiting fans. 

In an audit by the Washington Department of Revenue, the Department determined that Riot’s attendance at the conventions in 2010, 2011 and 2012 created a sufficient nexus with Washington to trigger the B&O tax.  Riot disagreed with this determination for 2010 and 2011 because it did not make any sales at the convention in those years, and obtained a temporary revenue registration certificate in August 2012.  Instead, it contends that it did not have a nexus with Washington until it hired an employee located in the state in November 2012, at which point it registered with the Department for tax reporting purposes on a permanent basis. 

In February of this year, the Board upheld the Department of Revenue’s nexus determination, finding that Riot’s activities at PAX were sufficient to allow Riot to maintain a market for its products in Washington.  Although no sales were made at the convention in 2010 and 2011, Riot had gross sales to Washington customers of $533,410 and $1,573,083 in those years.  The Board noted that Riot employees interacted with PAX participants by promoting League of Legends and engaging in gaming tournaments with public participants.  The Board also held that Riot obtaining a temporary revenue certificate in 2012 did not bar the Department of Revenue from determining upon further information that an additional tax would be due.  While the trade convention exception did not go into effect until July 2016 and thus was not applicable to the audit period, the Board noted PAX was marketed to the general public and would not fall under Washington’s trade convention exception. 

A sales tax obligation arising from attendance or participation at a trade convention is not a new concept.  Like Washington, many states provide more lenient rules regarding sales tax nexus in an attempt to encourage conventions and the economic benefits that result from such conventions.  For example, in California, any out-of-state business whose sole activity in the state is engaging in a convention or trade show for less than 15 days and whose gross income from that activity is less than $100,000 is not considered to have a nexus with the state for tax purposes.  Riot’s case demonstrates the importance of investigating the state tax laws well in advance of attending a trade show in another state because each state has its own rules, and participation at a trade show in another state may put an organization at risk of tax obligations there. 

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