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Came across an article today and it made me wonder how many Kickstarter projects aren't or don't believe they owe taxes on pledges received?

http://movies.yahoo.com/news/dangers-veronica-mars-kickstarter-victory-050000916.html

Well if i could pledge, i am not in America so it wouldn't concern me.

The people who don't realize they have to pay taxes on income, are likely the same ones whose businesses won't be around for very long anyway.

Also, this is all in the guidelines for Kickstarter that all project creators should have read.

My wife and i bought into this one.

The short answer of course is lots of them...

Under the standard format (in order to allow companies like KS to skirt securities laws) is to classify the money as 'donations' - just money party A gives to party B. Party B gives party A something in return, but it isnt in return for the money (to skirt commerce laws).

Courts have disagreed in several cases though and have variably ruled it is commerce or it is an investment. Most of those cases are from the backer side of things though, and I dont recall any tax related court cases off the top of my head (though being around long enough there probably have been one or two by now). I know last fall when the WSJ ran their articles on crowd funding, there was still some level of debate as to the specific tax category it should be classified under by their writers (a couple tax attorneys). Consensus was definately that the IRS and state tax authorities would definately be looking for their cut of the pie though, and speculated that audits would be coming based on the increased profile of crowd funding campaigns.

See that's the thing as to me a kickstarter is just preorders so taxes would.need to be paid out. For me and my states laws i would have to pay.for any backers i shipped to in Massachusetts but not on everybody else. I would be entering the money made used in my taxes so why wouldn't i have to pay on it. I was surprised about the California law and not being allowed to charge for roles.

That sort of goes back to some of the old payolla laws. Parents would take out a second mortgage on their house and pay a studio money to get their kids on screen in hopes of creating a recurring payday with a new child star. I forget which studio it was, but one was involved in a bit of a scandal in the late 1970s IIRC.

On the preorders, while that is how a lot of companies are using it...the KS terms strictly prohibit it as specifically that. Preorders and products implies that KS would be an agent for the commerce and be on the hook should the project creator flake out on fulfillment. That is why they use the terminology that they do. Also, a lot of projects have the $1 or $5 price point where the reward is something like your name on a list of thank yous or in the back of a book (though those generally cost more). Since those pledge levels are not tied to a specific expense for the creator to tie their pledge to (like a product reward might be) then the tax issues become more complicated.

You also have charities which are not charities from time to time. I think it was last year that their was an Indie GoGo campaign for a bus driver who was picked on. That raised over half a million dollars. Although it wouldnt qualify as a legal charity (501c3), but at the same time, she probably wouldnt be on the hook for taxes either. Pledges would probably be classified under gifts (forget the code...think 129 or 131...) which allows a grantor to give up to $13k to a person as a gift with no tax liability. Over the $13k limit, the grantor...not the recipient is responsible for the taxes to be paid.

A more complicated situation can exist for B2B relationships where a backer is a company getting goods for resale. They need certain documentation for their own business and that complicates KSs claim of not be a commerce site. I think that was the motivation for them to place their bulk purchase ban (not sure if that is still in place though).

Lot of good can come of it...but I wouldnt think of running one without my CPA being involved before, during and after to make sure everything is fully documented and we dont get caught off guard with some obscure tax clause that put us on the hook for a large bill.

I'm kickstartered out.

Tired of some of the stuff I have had to go through for some, and gak attitude and lack of discussion from the rest.

I can count the good ones on one hand that I've been in on.

I see a day very soon when kickstarter dies, or gets regulated to the point of unviability.

In talks with my credit card company, they think KS is a logistcal nightmare. Collection and trying to recoupe funds from months past of a project failure to them actually makes them do thier jobs.

 Sean_OBrien wrote:
That sort of goes back to some of the old payolla laws. Parents would take out a second mortgage on their house and pay a studio money to get their kids on screen in hopes of creating a recurring payday with a new child star. I forget which studio it was, but one was involved in a bit of a scandal in the late 1970s IIRC.

On the preorders, while that is how a lot of companies are using it...the KS terms strictly prohibit it as specifically that. Preorders and products implies that KS would be an agent for the commerce and be on the hook should the project creator flake out on fulfillment. That is why they use the terminology that they do. Also, a lot of projects have the $1 or $5 price point where the reward is something like your name on a list of thank yous or in the back of a book (though those generally cost more). Since those pledge levels are not tied to a specific expense for the creator to tie their pledge to (like a product reward might be) then the tax issues become more complicated.

You also have charities which are not charities from time to time. I think it was last year that their was an Indie GoGo campaign for a bus driver who was picked on. That raised over half a million dollars. Although it wouldnt qualify as a legal charity (501c3), but at the same time, she probably wouldnt be on the hook for taxes either. Pledges would probably be classified under gifts (forget the code...think 129 or 131...) which allows a grantor to give up to $13k to a person as a gift with no tax liability. Over the $13k limit, the grantor...not the recipient is responsible for the taxes to be paid.

A more complicated situation can exist for B2B relationships where a backer is a company getting goods for resale. They need certain documentation for their own business and that complicates KSs claim of not be a commerce site. I think that was the motivation for them to place their bulk purchase ban (not sure if that is still in place though).

Lot of good can come of it...but I wouldnt think of running one without my CPA being involved before, during and after to make sure everything is fully documented and we dont get caught off guard with some obscure tax clause that put us on the hook for a large bill.

Great post!

I was going to chime in with a crowd-funding/securities regulation law tid-bit, but you definitely have this one covered (and in quite a bit more detail than I could have provided without dusting off my Business Associations textbook)

Under the standard format (in order to allow companies like KS to skirt securities laws) is to classify the money as 'donations' - just money party A gives to party B. Party B gives party A something in return, but it isnt in return for the money (to skirt commerce laws).

IIRC the starting point cases for what a security / investment contract is in the states are:

Joiner Leasing, WJ Howie, and Hawaii Markets Center.

Eventually you end up with a test like this:

1) the public solicitation of venture capital
2) induced by promises of profit
3) subjected to risk
4) no managerial control


Most kickstarters would fail at number 2 (but pass the other criteria), I haven't seen any that promise a return on investment.



I think the aussies are taking a hard look at regulating crowdfunding under some form of securities regulation.

czakk wrote:
Most kickstarters would fail at number 2 (but pass the other criteria), I haven't seen any that promise a return on investment.

Does the fact that most advertise how much you are saving under retail count? For example, Warzone has a chart that shows how much you save off of retail at the different pledge levels.

--------------------------
Edit- found it: http://www.minterellison.com/publications/regulation-of-crowd-funding-in-australia/


Automatically Appended Next Post:

 pretre wrote:

czakk wrote:
Most kickstarters would fail at number 2 (but pass the other criteria), I haven't seen any that promise a return on investment.

Does the fact that most advertise how much you are saving under retail count? For example, Warzone has a chart that shows how much you save off of retail at the different pledge levels.

Here's the full test instead of my foggy rememberance:

State of Hawaii, Com’r of Securities v. Hawaii Market Center, Inc. et al. (1971), 485 P. 2d 105 at p. 109

(1) An offeree furnishes initial value to an offeror, and

(2) a portion of this initial value is subjected to the risks of the enterprise, and

(3) the furnishing of the initial value is induced by the offeror’s promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and

(4) the offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise.



This is the test we imported into Canada, you folks in the States may have moved on from it.


A discount likely wouldn't meet the requirement - unless you were selling some sort of collectable intended to grow in value and advertising that you could park your money in the collectable and have it grow.


"Buy my limited edition miniature for 20% off". Probably okay. It's just a pre-order with a discount, that's pretty standard.

"Buy my limited edition resin miniature for 20% off. In the past my limited edition resin miniatures have appreciated in value 500% - very sought after on ebay. This kickstarter which will let me make them in hard plastic and get them into Walmart, all the publicity is going to make the higher quality limited edition Resin versions even more popular - there is going to be a huge secondary market, you'll be able to make a killing reselling these to people who didn't get in the kickstarter in a few years...This can't fail!!!" Probably crossing the line.

Value is the hard one in most the cases though, as value isnt always direct monetary gain, and sometimes the value is clearly there (20% is value afterall). IF it isnt investment, it has to be something. KS will fight the investment claim, but they will also fight claims of being a preorders. They just want to take their cut of the pie and not get tied up in any long term legal issues dealing with fulfillment.

Right now I think there are two cases which KS is party two because of their ambiguous nature. One is the Form Labs patent suit and I think the Hanfree case is still ongoing. Form Labs are pursuing them as an investment, Hanfree as a preorder.

Kickstarter is more like a stock broker and stock market than a charity or production company.

Kickstarter's role is simply to make the offer available to the potential clients, collect the funds and transfer them to the offeror, minus a fee. The fee comes out of the offeror's income, not the client's.

Kickstarter don't pretend to judge the risk or offer any promises, apart from the rules that govern the making of the offer (e.g. no porn.)

It clearly is the offeror's job, not Kickstarter's, to deliver the project, and the client's job to judge the risk.

Was talking with a FLGS owner today who just got back from GAMA and had actually attended a panel on Kickstarters and their impact on game stores and the industry. The word from the panel, don't worry, most will fail.
There was a tax lawyer there, and he stated that due to US tax law, any funds that have not been spent or dedicated that are left at the start of the calendar year, January 1st, are then taxed at 40%. They fall under non-profit status.
So a kickstarter that ends December 31st, is short 40% of its funds the next day.
Pretty sure this has hit several kickstaters already.
One detail he did make clear, if you have not spent the money, but have contracts in place with the money dedicated, you are safe. But if you have $2000 left to cover shipping after the 1st of the year and haven't pre-paid for the shipping costs, you owe $800 to Uncle Sam.


Automatically Appended Next Post:
Just to add, did a quick search of Kickstarters that are relevant to this board and people contributed. Imbrian Arts ended December 27th with $63K.
http://www.kickstarter.com/projects/1463917927/imbrian-arts-miniatures
Ouch, I almost donated to that one.

I think he misunderstood things...or didnt relay the tax issues clearly.

Unless they are have their business organized as something like a 'doing business as' then they would be filing taxes monthly, quarterly or based on an arbitrary fiscal year and not the calender. They are also able to project expenses that they havent actually paid and back date a lot of things based on future expenses and taxes paid.

As far as how many succeed and fail...the general average success is 44% - but that includes a lot of failed music, theater and other artsy stuff. Games, the things which would be of interest to GAMA and forums like these tend to have a success rate of 80-90% for minimum funding levels. Failures tend to be related to an issue with the project (no clear goals, outstanding orders, poor presentation, lack of a refined concept).

The bigger reason for game retailers not to worry isnt that most will fail or that crowd funding is a fad, rather that such a small portion of the market participates, that the long term effects on retail sales should be minimal. The upside also happens to be a ready collection of early adopters who will help to bring others in after the KS campaign has ended.

 Sean_OBrien wrote:
I think he misunderstood things...or didnt relay the tax issues clearly.

Unless they are have their business organized as something like a 'doing business as' then they would be filing taxes monthly, quarterly or based on an arbitrary fiscal year and not the calender. They are also able to project expenses that they havent actually paid and back date a lot of things based on future expenses and taxes paid.

As far as how many succeed and fail...the general average success is 44% - but that includes a lot of failed music, theater and other artsy stuff. Games, the things which would be of interest to GAMA and forums like these tend to have a success rate of 80-90% for minimum funding levels. Failures tend to be related to an issue with the project (no clear goals, outstanding orders, poor presentation, lack of a refined concept).

The bigger reason for game retailers not to worry isnt that most will fail or that crowd funding is a fad, rather that such a small portion of the market participates, that the long term effects on retail sales should be minimal. The upside also happens to be a ready collection of early adopters who will help to bring others in after the KS campaign has ended.

Well I'm just conveying what I heard. Will press him for more details tomorrow.

And just because a kickstarter has been funded doesn't mean it will deliver you have demonstrated that already. Where are you getting 80-90% The overall game category has a success rate of 34% for funding.

I think he's saying that 80-90% of gaming projects that fund will go on to deliver (eventually)

No...most games (that GAMA would be concerned with) get funded. Most video games fail in a spectacular manner - down in the mid teens. Tabletop games though have a very high success rate, that would include that various miniature games, board games and card game projects. Was covered last fall IIRC in their year of the game article and again last week at PAX East.

You have a lot of people who are looking for very high dollar goals for video games though (and often with not much to show to get there). Tabletop games are much smaller dollar amounts - a few thousand for molds for metal miniatures...or maybe $10k for a print run on a card game. Everything is normally done for the game...other than the actual manufacturing. An artist has their greens sculpted, a game designer has a prototype and some game play videos. They might need a little extra for graphic design costs, but there tends to be something backers can bite into.

 Sean_OBrien wrote:
No...most games (that GAMA would be concerned with) get funded. Most video games fail in a spectacular manner - down in the mid teens. Tabletop games though have a very high success rate, that would include that various miniature games, board games and card game projects. Was covered last fall IIRC in their year of the game article and again last week at PAX East.

You have a lot of people who are looking for very high dollar goals for video games though (and often with not much to show to get there). Tabletop games are much smaller dollar amounts - a few thousand for molds for metal miniatures...or maybe $10k for a print run on a card game. Everything is normally done for the game...other than the actual manufacturing. An artist has their greens sculpted, a game designer has a prototype and some game play videos. They might need a little extra for graphic design costs, but there tends to be something backers can bite into.

The only success number Kickstarter listed in the Year of the Game article http://www.kickstarter.com/blog/the-year-of-the-game article was board games had a 47% success rate vs 23% for video games for funding. So I have to ask again where are you getting that supposed 80-90% number from? To jump from 47% to a over 80% success rate in half a year seems hard to believe.

It says only that 47% of board games have been successfully funded. Funding is when the project receives its target level of pledges.

This does not tell us what percentage of successfully funded games get completed, which is what users are concerned about.

"Board and card gaming is a great fit for kickstarter because it's very niche-specific. Most people have zero interest in backing a board game, and those who do have very high quality standards, but those who do will back projects with great enthusiasm."

Taylor Pratt