Need funding to get your idea off the ground? Turning your idea into a Kickstarter project just might be the ticket to getting the funding you need. Just don’t forget about the tax implications of using a fundraising platform such as Kickstarter.
Generally speaking, the funds received through a fundraising platform are reportable as revenue for income tax purposes. That makes sense, right? You’re getting money and most money is taxable.
Sales + Use Tax
If you’re thinking about offering a gift for a contribution (maybe it is the product you are trying to fund), you might create a sales or use tax obligation.
Can’t remember what the difference between sales and use tax is? Click here to find out.
While sales tax typically applies to the sale of goods or select services, use tax typically applies to gifts. So if you’re offering a gift, you may need to pay use tax to the appropriate state. The use tax is generally calculated based on the cost to produce the product, not the retail price.
What’s with typically and generally? Remember, your responsibility to remit sales and use tax depends on whether or not you have created nexus. Doesn’t ring a bell? Click here to find out more.
Let’s take a look at an example. Suppose you live in North Dakota and are doing a Kickstarter project for a new granola bar. Individuals contributing $50 to your project will receive five granola bars, because you’re nice like that. You will be selling the granola bars for $4/bar (retail), however, they cost you $2 to produce. When you gift the granola bars (meaning you take them out of your inventory at $2/bar), you are on the hook to pay use tax to the State of North Dakota in the amount of $2 times the applicable use tax rate.
What if the individual contributing is in Iowa? North Dakota tax still applies.
The Bottom Line
Taxes aren’t easy. If you are thinking about starting a Kickstarter project (or another similar fundraising platform), consider speaking to your tax professionals before you start your project. And remember, you might need both an income tax expert and state and local tax (SALT) expert in your corner. If you don’t have them, we’ve got them and they love this stuff.