by Liz Armbruester
In recent years, more brands have turned to ecommerce and online sales to boost revenue resulting in an acceleration of omnichannel commerce. The traditional in-store shopping experience has been upended by new choices for consumers like buy online and pick up in-store. In fact, according to Wix, 76 percent of consumers are more likely to buy from brands that personalize experiences across touchpoints. Even as retailers work to manage traditional methods needed to provide an omnichannel experience, there is a new channel they must take into consideration — the metaverse.
Over just the past few months, many retailers have been embracing the metaverse as well as the benefits it offers to transform the shopping experience. Earlier this year, major retail brands participated in the first Metaverse Fashion Week, and other brands like Gucci have launched virtual clothing collections within the digital world. While the full impact and opportunity for retailers associated with the metaverse is likely yet to be seen, it is not too early for brands and companies to begin thinking about the regulations and complexity that comes with another sales channel joining the fray.
Here are some hidden complexities that retailers should be mindful of when considering adding the metaverse to their omnichannel strategy.
Tax is Still Applicable in the Digital World
The taxman exists virtually everywhere, and the virtual world is no different. Whether transactions involve buying land and real estate in the metaverse, or luxury handbags, the real-world revenue generated will still be taxable.
Gaming company Second Life began charging users sales tax in their metaverse reality earlier this year after previously covering the costs — citing the United States Supreme Court decision in South Dakota v. Wayfair, Inc., which allows states to tax remote sales, as justification for collecting tax. Earlier this year, CPA firm Prager Metis opened a metaverse office for accounting and financial advisory services, citing the “need for financial expertise and resources in the evolving digital world.”
As most transactions within the metaverse occur using cryptocurrency and digital assets, tax authorities are evolving their strategies to ensure they get a portion of tax revenue from these sales. In March, New York Attorney General Letitia James published a notice reminding cryptocurrency investors to pay taxes on virtual investments. In the coming months and years, expect more tax authorities to establish these precedents that reassure the jurisdiction state and local governments have for receiving tax revenue on virtual transactions.
States are Beginning to Think About How to Regulate the Metaverse
Many states have not yet addressed the taxability of goods sold in the metaverse. While every state with a sales tax taxes most sales of tangible goods, virtual goods and products complicate tax determinations for tax authorities.
While most tax authorities have not laid out their plans to tax transactions in the metaverse, some have taken the first steps by taxing digital assets. Washington state outlined the country’s first policy for NFTs, which would make them taxable under sales and business taxes. Legislation in Delaware, Florida, and Indiana also aim to pose new regulations on virtual currency or game-related digital content.
As these legislative bodies deliberate on how to regulate the metaverse, we can expect greater clarification from state tax authorities, but as the Wayfair decision showed us, we can also expect a dynamic tax landscape that continues to evolve to follow new innovation in the digital world.
There is no doubt that the metaverse will continue to impact many industries, with retail taking center stage. As Gartner predicts, 30 percent of the world’s organizations will be selling goods and services in the metaverse by 2026. The next iteration of retail is here, and as more brands embrace the new opportunities offered by the metaverse, they need to remember that new regulations and taxes will follow. Keep in mind these changing regulations and potential tax burdens to ensure compliance obligations are met.
Liz Armbruester is the SVP of global compliance at Avalara.