Is There Tax on Digital Games? What Buyers Need to Know

Buying digital games isn’t always as simple as paying the listed price. Depending on where you live, taxes may be added at checkout, increasing the total cost. These taxes vary based on local laws and how different governments classify digital goods.

Understanding when and why these taxes apply can help buyers avoid surprises and make informed purchasing decisions.

Sales Tax on Digital Games

Sales tax on digital games depends on how a jurisdiction defines and regulates digital goods. In the United States, sales tax is determined at the state level, meaning some states tax digital downloads while others do not. Texas and New York apply sales tax to digital games, while Oregon and Montana do not impose any sales tax. Even within states that tax digital goods, rates vary based on local tax jurisdictions, leading to different final prices depending on where a buyer is located.

Retailers selling digital games must collect and remit sales tax if they have a tax nexus in a state that requires it. A tax nexus is established when a business has a significant presence in a state, which can be triggered by physical locations, employees, or a certain level of sales. The 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc. expanded the definition of nexus to include economic thresholds, meaning online sellers must collect sales tax if they exceed a state’s revenue or transaction limits. South Dakota, for example, requires businesses to collect sales tax if they generate over $100,000 in sales or conduct 200 or more transactions in the state annually.

Marketplaces like Steam, PlayStation Store, and Xbox Store typically handle sales tax collection on behalf of game publishers. However, some smaller digital storefronts may not automatically calculate sales tax, leaving buyers responsible for reporting and paying use tax. Use tax applies when sales tax was not collected at the time of purchase, and consumers are legally required to report it on their state tax returns. While enforcement varies, states like California and New York actively audit taxpayers to ensure compliance.

VAT and GST on Game Purchases

Value-added tax (VAT) and goods and services tax (GST) apply to digital game purchases in many countries, often making them more expensive than their listed price. Unlike sales tax, which is often added separately, VAT and GST are usually included in the advertised price, meaning buyers may not always realize they are paying them.

Governments worldwide have updated tax laws to ensure digital services, including game downloads and in-game purchases, are subject to VAT or GST. The European Union requires businesses selling digital products within its member states to apply VAT based on the buyer’s location. A game purchased in Germany incurs a 19% VAT, while the same game in Sweden is taxed at 25%. The United Kingdom imposes a 20% VAT on digital sales. Platforms like Steam and PlayStation Store automatically calculate and collect VAT at checkout, remitting it to the appropriate tax authorities.

Australia and New Zealand also tax digital game purchases under their GST systems, with rates of 10% and 15%, respectively. Both countries introduced these measures to prevent foreign digital retailers from having a tax advantage over domestic businesses. Sellers exceeding a revenue threshold—AUD 75,000 in Australia and NZD 60,000 in New Zealand—must register for GST and collect it on sales to local consumers.

For consumers, VAT and GST can significantly impact the total cost of digital games, particularly in countries with high rates. A game priced at €50 in an EU country with 25% VAT ultimately costs €62.50. Some regions, such as Japan, have lower tax rates—10% in this case—resulting in a smaller markup. However, buyers should be aware that tax-inclusive pricing varies by platform, and some storefronts may display pre-tax prices, leading to unexpected increases at checkout.

Regional Variations in Tax Rules

Tax treatment of digital game purchases differs widely, not just between countries but even within regions of the same nation. Some governments classify digital games as electronically supplied services, while others categorize them as tangible-like goods, leading to differences in how they are taxed. South Korea applies a 10% value-added tax on digital content but also imposes an additional cultural levy on gaming transactions to support local media development. Brazil enforces multiple layers of taxation, including federal and state-level taxes, which can push the final cost of a game significantly higher.

In Canada, digital game taxation is further complicated by the interaction between federal and provincial tax systems. The federal Goods and Services Tax (GST) applies nationwide at 5%, but provinces like Quebec, Ontario, and British Columbia add their own sales taxes, resulting in combined rates that vary by location. Quebec, for instance, levies a 9.975% Quebec Sales Tax (QST) on digital purchases, requiring foreign sellers to register and remit payments under the province’s digital tax regime.

Some governments have also introduced digital services taxes (DSTs) that indirectly affect game pricing. India imposes a 2% equalization levy on foreign digital service providers, which, while not a direct tax on consumers, can lead to price adjustments by companies. Similarly, Turkey enforces a 7.5% digital services tax on revenue earned by large online platforms, contributing to higher prices for digital goods. These policies reflect a broader trend of governments seeking to capture tax revenue from multinational digital enterprises that historically operated with minimal local tax liabilities.

Exemptions and Thresholds

Some jurisdictions provide tax exemptions for certain types of digital game purchases, either to promote specific industries or to avoid double taxation. In the European Union, businesses registered for VAT under the reverse charge mechanism may not be required to pay VAT on digital game acquisitions if they are classified as business-to-business (B2B) transactions. This rule shifts the tax liability to the buyer, meaning companies purchasing games for commercial use may account for VAT through their own filings rather than paying it at checkout.

Tax thresholds also determine whether a digital game purchase is subject to indirect taxes, particularly for cross-border transactions. Japan, for example, only imposes consumption tax on foreign digital sellers if their annual revenue from Japanese customers exceeds JPY 10 million. The Philippines applies a similar model, exempting foreign digital providers from its 12% VAT if their local revenue remains below PHP 3 million per year. These thresholds prevent administrative burdens on smaller sellers while ensuring large digital platforms contribute tax revenue.

Seller Obligations

Companies selling digital games must comply with tax regulations based on where their customers are located, not just where the business operates. This means international platforms like Steam, Epic Games Store, and PlayStation Store must register for tax collection in multiple jurisdictions. Many governments have implemented marketplace facilitator laws, which shift the responsibility of tax collection from individual game developers to the platforms that distribute their products. This simplifies compliance for smaller publishers but places a greater burden on digital storefronts to track and remit taxes correctly.

To enforce compliance, tax authorities require foreign sellers to register for tax collection if they exceed certain revenue or transaction thresholds. The European Union’s One-Stop Shop (OSS) system allows non-EU businesses to register in a single member state and remit VAT for all EU sales. Similarly, Canada’s digital sales tax rules mandate that foreign sellers register and collect GST/HST if they surpass CAD 30,000 in annual sales to Canadian consumers. Failure to comply with these regulations can result in penalties, interest charges, or even restrictions on operating within certain markets. Some countries, such as Indonesia, have blocked digital services that fail to meet tax obligations, demonstrating the increasing global enforcement of digital sales taxation.

Record-Keeping for Buyers

Consumers purchasing digital games may need to keep records of their transactions for tax reporting or refund claims. In some jurisdictions, buyers can deduct VAT or GST on business-related digital purchases, requiring them to retain invoices that include the seller’s tax registration number and the amount of tax paid. This is particularly relevant for self-employed individuals or businesses that use gaming software for content creation, game development, or educational purposes.

Some regions also require consumers to report and pay use tax if sales tax was not collected at the time of purchase. In the United States, states like Colorado and Louisiana mandate that taxpayers declare untaxed digital purchases on their tax returns. Keeping detailed records of digital game purchases, including receipts and tax breakdowns, can help buyers avoid penalties or unexpected tax bills if audited.