Wisconsin Quietly Announces Sales Tax Rules on NFTs

Emblematic of a trend gaining momentum, Wisconsin becomes the fifth U.S. taxing jurisdiction to promulgate official guidance regarding the applicability of sales tax to non-fungible tokens (NFTs). Going as far back as 1976, Wisconsin published a periodic “Tax Bulletin” announcing new laws, letter rulings and status updates on tax-related litigation. In its most recent edition (#219), under the heading “Sales and Use Tax Updates and Reminders,” Wisconsin dropped in the following language:

Non-Fungible Tokens

A non-fungible token (NFT) is a unique digital identifier that is recorded in blockchain. NFTs are used to certify authenticity and ownership of a particular product and cannot be copied or substituted.

The sale or purchase of a NFT may be taxable if the underlying product, good, or service is taxable in Wisconsin.

Example 1: NFT entitles the purchaser to download music or movies. The sale of the NFT is a taxable specified digital good.

Example 2: NFT entitles the purchaser an admission to a sporting event. The sale of the NFT is a taxable admission.

Example 3: NFT entitles the purchaser to a tangible piece of artwork. The sale of the NFT is taxable tangible personal property.

Wisconsin’s guidance is not unlike what was published by Minnesota in Fact Sheet #177 just a few weeks ago, and is wholly consistent with the prevailing theory that assets represented by NFTs should be taxed identically to the underlying asset the NFT represents, whether that asset be digital (e.g., digital art) or physical (e.g., a bottle of wine). While Pennsylvania and Puerto Rico have also declared NFTs to be taxable, their published documentation is not sufficiently detailed to articulate the basis of their policies.

Far and away, Washington’s interim statement regarding the taxability of NFTs represents the most thoughtful guidance on this topic. It not only articulates a theory of taxation but also attempts to address some of the fundamental compliance challenges associated with extending sales tax into this new technology. As reported here, Washington also recently held a taxpayer “listening session“ on the topic of NFTs. During the session, while the state’s department of revenue clearly acknowledged the need for even more guidance to effectively enable compliance, it also specified that, to the extent an NFT represents an asset currently taxable under Washington law, tax should be collected and remitted today.

In an ideal world, an organization like the Multistate Tax Commission (MTC) would step in, providing states a uniform template detailing the fundamental issues that should be addressed as states officially extend their sales tax to address NFTs, and while the MTC Uniformity Committee is beginning to consider a white paper on the topic of digital products, it is still in the process of defining what will constitute its fundamental approach and likely will not reach the topic of NFTs for quite some time.

In this environment, NFT sellers and marketplaces squarely find themselves in a compliance conundrum. Not only do they need to track published state policy, but they must also predict which states will consider NFTs to be taxable under existing law, which states may be aggressive in enforcing compliance and how to manage their compliance around this evolving technology. It’s a complicated world!