Washington Revenue Official Tries to Clarify Position on NFTs

By: Amy Hamilton

The Washington Department of Revenue has not decided whether it will pursue tax on sales of non-fungible tokens (NFTs) for transactions that occurred before July 1, 2022, the date the agency published interim guidance.

That is according to Gil Brewer, senior assistant director of tax policy for the DOR, who touched on the issue November 16 during a roundtable session featured as part of the Multistate Tax Commission’s fall committee meetings.

In its interim guidance statement, the DOR described NFTs and laid out relevant Washington legal definitions for tax purposes, including “digital code,” “digital automated services,” and “marketplace facilitator.” The guidance discussed how the DOR would determine the proper state tax treatment of the sale of an NFT and provided examples of transactions when sales and use tax or business and occupation tax would apply.

When the DOR held a public meeting on the interim statement in October, revenue officials spent about 10 minutes of the nearly one-hour session addressing concerns that the guidance applied retroactively. Members of the public wanted to know when Washington started taxing digital products; revenue officials said that the State Legislature passed laws starting in 2009 that extended existing state taxes to digital products, and that NFTs typically fall into one of the digital tax imposition categories.

During the public meeting, revenue officials said the interim guidance simply clarified how Washington law applies to NFTs. Regarding the public not knowing Washington tax law, officials said the DOR understands that this is an emerging area, and that they could not promise prospective treatment but that the department is open to understanding why prospective application might make sense in some contexts.

Brewer said that after that public meeting, “there were reports that Washington would be applying sales tax retroactively” to transactions that occurred before July 1. “Given the volatility in the market and the fact that prices have dropped, taxpayers were a little worried they might owe sales tax that exceeded the present value of their NFT,” he said of the reports.

“First, nothing is retroactive,” Brewer said.

Washington’s statute was adopted in 2009 and it hasn’t changed; tax would be due any time after that, Brewer said. “What people are perceiving as retroactive is imposing tax before we put the specific guidance out on NFTs,” he added. “But, as you all know, you don’t have to have a rule or public guidance for tax to be due — the statute applies regardless. So, there’s no retroactivity involved here.”

“However, there has not been a decision on an administrative basis if we’re going to pursue tax on those prior transactions,” Brewer said. He said the DOR has requested and is accepting comments on the difficulties that this would cause for taxpayers and will consider those comments.

“So, to the extent you may have heard that we are retroactively taxing NFTs, I guess I could say, ‘Not yet,’ — and even if we do, it’s not retroactive,” Brewer said. “But we get the problem, we understand the issue, and we want to take a good look at it.”

Brewer then discussed what he said is the other side of the issue, which was the decision by Washington lawmakers more than a decade ago to adopt an approach and flexible tax imposition categories that would allow the state to broadly apply its existing taxes to a rapidly changing and mutating stream of new products.

“What was a product yesterday is something different tomorrow,” Brewer said. “What good is it to have a statute that covers that if, every time a new product appears or a variation, you have to put out a notice that, ‘Oh, this is in here, too.’ That’s not why that law was written that way.”

“But we do recognize some hardship in this case, and we’ll be looking at it,” Brewer said.

The DOR is seeking comment on the interim guidance by December 30.