We’ve already seen China taxing virtual goods, and now it looks like the IRS will soon be doing the same. US National Taxpayer Advocate Nina E. Olson, “responsible for assisting taxpayers to resolve their problems with the IRS, identifying taxpayer problem areas, and recommending IRS administrative changes or legislative solutions to correct those problems,” recommended in the Executive Summary of her annual report that the IRS look into how to tax virtual goods. “Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities,” says the report.

Olsen estimates that the sale of virtual goods was about $1 billion in 2005, and that there are more than 16 million subscribers. Despite the ever growing number of people and dollars in virtual worlds, there is no set procedure in place for taxing virtual goods.

“IRS employees have been unable to respond to taxpayer inquiries about how to report transactions associated with them.”

Virtual goods will inevitably be taxed in the US; this is a global trend. In addition to China, other countries are either taxing or planning to tax virtual goods. South Korea already does so, and both Sweden and Great Britain are in the process of implementing similar legislation.

In other internet tax news, it looks like New York’s contested “Amazon Tax” will go through, as a judge dismissed lawsuits against it. This should be the first step in many states adopting similar measures.

By Mark Alvarez