At the State of Play/Terra Nova Symposium in New York last fall, Bryan Camp of Texas Tech School of Law gave us a primer on tax law as it relates to virtual worlds. I never knew that listening to a tax professor could be so illuminating and fun (really). Now he has written a paper giving a similarly engaging overview of the issues as they relate to SL and WoW.
And to think his elegant solution may be ruined by pizza...
The paper contains loads of useful information for us non-law types, in particular such helpful nuggets as the tax law distinction between imputed and gross income and how it may be the appropriate spot to draw the taxation line for virtual worlds. For Camp, it makes pragmatic sense to distinguish between activity within the worlds as, in a way, non-taxable diversions, and the taxable events that only happen when the "fourth wall" is broken. As he puts it (pp. 64-65),
The breakdown of the magic circle, the feared commodification of virtual worlds, can only come about when, like Pinocchio, the virtual becomes real. That will happen when economic activity in Second Life begins to displace economic activity outside Second Life. The most likely evidence of that will be when account owners gain the ability to trade Lindens for real goods and services that are useful outside Second Life, beyond the fourth wall, when you cannot tell the players from the audience...When online exchanges outside of Second Life -- such as Amazon.com or Staples.com -- start accepting payment in Lindens, that will mark the erasing of the magic circle. At that time Second Life will become a barter club and Linden Dollars will cease to be a unit of play and will become Trade Credits. Whether or when that time will come I have no idea.
Professor Camp, meet Pizza.net. If this press release is to be believed, that fourth wall may be broken very soon...by the pizza guy. Residents are apparently up in arms over SL's technical challenges, but who can argue with the appeal of a slice?