Diablo 3 Could Enforce Government Taxation On In-Game Goods

By Adam Ma on September 29, 2011, 7:03PM EDT

Ever since the online gaming scene has exploded people have been wondering how long it will be until the government finally steps in and starts taxing those sweet virtual downloads. The IRS in particular has been trying hard to pin down what sort of taxation should be applied to intangible property, and while some countries have successfully managed to implement a taxation on imaginary goods, North Americans have been largely free of government regulation. But few games carry the development force that Diablo 3 carries, and fewer are those that have as recognizable a household name as Blizzard. So when one of the most recognizable game developers in the world announces a plan that will allow gamers to trade digital goods en masse, while at the same time netting Blizzard a bit of profit for every transaction made without any sort of regulation it leaves little doubt that those looking to capitalize off of these virtual goods are going to feel even more pressure to try and take a slice of the cake. Depending on the how much money Blizzard makes off of the auction house it may even pressure certain government groups to take action sooner rather than later.

Up until this point digital transactions have been largely limited to small items up for grabs, with a few exceptions in between. Games like League of Legends and D&D Online have made their money off of allowing players to selectively purchase portions of their game, while other titles like Planet Calypso tend to capitalize on sales like a 330,000 USD virtual space station. Either way it's fairly clear that businesses are able to make some impressive cash on these micro-transactions. So much revenue, that on a small scale they allow a developer like Riot Games to stay well situated while a more established developer like Blizzard is able to draw in an additional 2 million dollars from a single in-store item in just 4 hours of its launch. It's no shock that in 2009 the US government started to look into serious ways of taxing these online transactions.

The problem with virtual transactions is that although they may be unique to the internet, there are plenty of other cases where customers have paid for intangible goods. Television is a fantastic example as most subscribers these days have the option of purchasing individual channels (or even channel packages) that they would like to view. These channels are still subject to taxes just like any other real product, despite that no customer could ever actually physically handle the product itself. So while gamers may not like the idea there's a fantastic case for the government to look into taxation of these 'virtual goods'. The excuse has always been there, and the scale of these transactions is certainly indicative of how much cash is being processed between the developers and consumers, but what's been missing (on a large scale) is the customer being able to engage in these sales on a platform of their own.

Enter Diablo 3, where gamers will have the power to trade in-game items for gold or real world currency via PayPal. One could certainly look at it as a developer-funded Craigslist, where the only thing that people could purchase/trade are fake goods, but in this instance the thing being traded and sold never belonged to them in the first place. Blizzard has always been extremely careful with their terms of service, mostly from individuals selling their World of Warcraft accounts for large sums of cash and cheating Blizzard of the potential sales from a new account/subscription fee. This also means that Blizzard knows quite well that since what's being traded is their property they're in full rights to ask for a small cut and name the fee whatever they want.

It's not a matter of wanting to be taxed further, or believing that taxation on virtual goods is right or wrong, but more of a look at the history of goods and services. It's a miracle that in many places taxation on subscription fees and virtual items has gone completely unmolested, particularly in today's global economy. Whenever another major company draws in millions of dollars from a single item, or a brand new company has started up using nothing but a Free To Play business model it's hard not to cringe and wait for the announcement to come. Diablo 3 just seems too large a target to ignore, and coupled with the fact that PayPal is the most recognized form of online transaction mediation you can bet anything that all the wrong people will be closely watching how successful this new auction house is.

In a way it's hard not to argue that Diablo 3's cash/gold auction house isn't brilliant, and the concept has already attracted a lot of positive attention from fans of the franchise. But to let Blizzard simply encourage the sale/trade of virtual goods completely unregulated while reaping the profits is something I cannot imagine any government would do.

Gaming is certainly bigger today than it ever has been, and comes in many different forms. There are also more avenues for a developer to take today than there ever have been before. With China already having adopted a tax on virtual goods in 2009, and countries like Korea ruling that virtual currency is as good as cold hard cash, one would imagine that most other taxation agencies are taking a hard look at how to capitalize on this very successful portion of the industry. By helping to define how much one 'gold' may be worth in real dollar value (and therefore determining what cut of the profit they can take), Blizzard may be doing all of the hard work for them.

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