SL tax information processing: Lab comments on recent delays

Since November 2013, the Lab has been attempting to operate in compliance with US Internal Revenue Service requirements by ensuring those Second Life users meeting “certain transaction thresholds” have filed required IRS documentation with the Lab (whether or not they are US residents).

News of this move first broke via an SL Universe forum thread, and was subsequently followed-up by bloggers such as Ciaran Laval and myself, and by the Lab also blogging on the matter.

As the tax and documentation requirements continued to cause some confusion, clarification was sought from the Lab, and additional documentation was published in February 2014 to further help people understand the requirements and how to comply with them. However, as the year has progressed, there have continued to be occasional issues with people actually getting the required paperwork processed by the Lab, affecting their ability to withdraw funds.

As reported by Ciaran Laval at the start of October, some people have once again recently  encountered delays in seeing their submitted documentation processed by the Lab. His post prompted a reply from Pete Linden, providing some insight into why delays are occurring:

Due to a significant volume of payout request in recent weeks, payout requests may take longer to process than expected. We apologize for the delay, and we are working hard on clearing the backlog and process requests as quickly as possible. In the meantime, we advise residents to please address any specific questions through their Support cases. We appreciate the cooperation and patience from all residents, and hope to have payout request processing times back to normal soon.

As Ciaran notes in following-up on Pete’s comment, it’s not clear why there has been a significant volume of payouts recently, although he suggests that it could be tied to the recent changes to the Lab’s Skill Gaming policy, which may have caused an increase in the number of people filing payment information with the Lab in order to engage with skill gaming regions.

Whatever, the reason, the Lab is aware of the situation, and hopefully taking the necessary steps to ensure delays are minimised and, as Ciaran states, “everything will be back on track in the near future and normal.”

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Linden Lab provide tax and account information FAQs

secondlifeAs many are aware, and as I’ve blogged about several times recently, Linden Lab are required to collect various items of documentation from Second Life users that meet certain transaction thresholds.

When the announcements were first made, it is fair to say that they resulted in confusion for a lot of people.

As a result of this, the Lab has put together a set of resources to help people to understand why the information is being requested, and what they need to do in order to comply with any request for information, should they receive one.

The new resources, in the form of two wiki FAQs, have been announced in an official blog post. Peter Gray, the Lab’s Director of Global Communications, dropped me a line to help spread the word of their existence, and I’m only too happy to do so.

The blog post reads in full:

As we’ve blogged about in the posts linked below, US law requires that institutions like Linden Lab collect documentation from Second Life users that meet certain transaction thresholds:

These documentation requests can sometimes be confusing, and so to help the users who receive them better understand what’s needed and why, we’ve created a list of FAQs about these requests here:

As noted in the FAQs, if you receive a request for documentation from Linden Lab and have additional questions, please open the request in your Case History in the Support Portal and reply to the Case.

Second Life tax requirements: form W-8BEN

As recently reported, in November, the Lab commenced e-mailing users meeting certain criteria to submit tax documentation to the Lab, which was subsequently expanded upon via a blog post on the matter.

In both the e-mail and blog post, reference was made to two IRS forms: W-9 (for U.S. residents) and Form W-8BEN (for non-U.S. residents), which must be completed and returned to Linden Lab within 30 days of any request for them being received in order to avoid having funds from accounts being withheld as stimplated by the US Internal Revenue Service (at the current rate of 28% of the gross amounts received).

With reference specifically to Form W-8BEN, concern has more recently be expressed at the fact it calls upon the person submitting it to provide either an Employer Identification Number (EIN) or an Individual Taxpayer Identification Number (ITIN), either of which must be obtained from the IRS. However, the EIN is not something everyone outside of the US may be in a position to obtain, while obtaining an ITIN can take from between four and six weeks (compared to the Lab’s stated requirement that the form and supporting documentation be submitted to them within 30 days of receipt of the request).

Confusion was further heightened when several people indicated that had supplied Form W-8BEN to the Lab without either an EIN or ITIN.

As a number of people contacted me on this matter, I dropped a line to Peter Gray, the Lab’s Director of Global Communications, asking of the Lab could provide further clarification as to whether Form W-8BEN must have either an EIN or an ITIN in order to be submitted to the Lab. He replied with the following:

Hi Inara,

The users whom we have asked to submit the W8-BEN need only complete the fields in Part I, #1-5 (which does not require an EIN nor an ITIN). 

We regret the confusion this form has recently caused for some users. To help avoid this confusion moving forward, we’ve uploaded a new version of the form that allows users to complete only the necessary fields and will update the messages sent to users when this information is requested.

Best,

Peter

[My emphasis in the above.]

Hopefully, this will resolve any confusion where this particular matter is concerned.

Also, and purely as a point of reference:

Deirdre Young pointed me towards Kat Fetisov’s attempts to unravel W-8BEN, which have also been referred to by Ciaran Laval.

Kat’s circumstances, being what is effectively a UK-based Sole Trader, are such that she was able to get an EIN directly from the IRS, with the form-filling taking place over the ‘phone.  Those who are in a similar situation as Kat may want to consider approaching the IRS to obtain an EIN for future reference. Should this be the case, please refer to Kat’s blog, where she has provided clear guidance on doing so based on her experience.

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LL give further clarification on tax requirements via e-mail

secondlifeOn November 21st, I posted an article about LL requesting tax information from some customers. Specifically, people had started receiving e-mails from the Lab asking them to complete IRS form W9, Request for Taxpayer Information, which caused some concern and confusion.

As a result, on Tuesday 19th November, Linden Lab moved to try to clarify matters, issuing a blog post entitled Required Tax Documentation. This indicated that the Lab is required by the US Internal Revenue Service (IRS) to collect and retain either Form W-9 (for US citizens) or Form W-8BEN (for non-US citizens) “at certain transaction volumes”. The blog post also noted that  those falling under the criteria who fail to submit a completed W-9 or W-8BEN  risk having 28% of their gross amounts received withheld. Finally, the post indicated that the Lab is required to file Form 1099-K with the IRS for US residents “with 200 or more transactions with a total amount in excess of $20,000” in a calendar year.

While this went some way towards clarifying the situation, it still left a number of questions and concerns unanswered; one of these being what exactly constitutes a “transaction”, as I noted at the time:

Is it related solely to cashing-out from Second Life, or is it based on the number of user-to-user transaction through the LindeX (i.e. the number of L$ sales a person makes per amount of L$ they offer on the LindeX? Or is it somewhere in between?

Long-term SL user and LL customer Desmond Shang decided to try to seek further information and answers from the Lab. As a result, he’s posted a couple of useful pieces on the SL Universe thread where some of the discussion on the matter has been taking place.

In the first, he recommends that anyone with specific questions / concerns should contact Linden Billing, noting that they have been reasonably responsive. He also points-out that while circumstances will vary from individual to individual, depending upon a range of factors, those who might be regarded as a “hobbyist” in SL might be able to claim some relief on revenue they receive through the platform. In particular he suggests IRS Publication 529 Miscellaneous Deductions might be worth a read, together with Can You Deduct Your Expenses From a Hobby? from Nolo.com.

More specifically, Desmond posts the Lab’s definition of a “transaction”:

Transactions are currently defined as sell orders placed on the LindeX and applies per person not per avatar. How that order is filled does not currently impact the transaction count. For example, if you place a sell order for L$5,000 and that order is matched with three different residents while being filled, it counts as one transaction.

The Lab also note that IRS criteria on withholding taxes is only on the transaction count itself and is only required if they do not have a valid W-9 or W-8BEN on file.

The key points here remain that firstly, these requirements will not impact everyone in Second Life. Secondly, if you have received a request for tax information from the Lab, it is important you do not ignore it, as you risk 28% of your gross amounts received withheld if you do. This applies whether or not you are a US citizen.

Additionally, those who have received a request from the Lab and who have questions / concerns should consider: a) contacting Linden Lab Billing for further information / with specific questions; b) seeking the advice of a tax professional.