Challenge
A rapidly growing multimedia company and eSports team was paying over $2M in CA state income tax. The company had been using a local CPA firm for federal and state returns but decided they needed a firm with tech industry expertise.
Solution
Armanino’s state and local tax specialists completed a state tax sourcing study and extensive data analysis to determine the proper income apportionment method for CA and other states.
Result
By establishing the correct apportionment method and accurately filing the necessary amended returns, the company achieved compliance and reduced their taxable liability in CA by $1.65M.
A multimedia solutions company owned a popular and successful eSports team. Managing this large group of professional gamers represented their largest revenue stream, as they receive a cut on sponsorship deals, livestream events, prize money, merchandise, etc.
As a Southern California-based company, they had been attributing 100% of their revenue to California and paid over $2M in state income taxes over a four-year period. As the eSports team’s success grew, the company’s accounting became more complex, and they were looking for a firm with tech industry expertise to help reduce their tax liability and improve their internal processes.
They needed to find an accounting firm with a deep understanding of the eSports industry and expertise in state and local tax (SALT) law. Armanino was recommended to them by a long-standing client of the firm and had just the team of specialists to assess the company’s needs and provide guidance regarding the tax implications of their complicated revenue model.
The company has a non-traditional way of making money because of their eSports team. While they are based in California, their audience is located all over the world. The basis for income attribution within California follows a “market-based” model, meaning that income is attributed based on where your audience or customer is located.
While the laws and regulations are still evolving in that they haven’t caught up with emerging industries like eSports, it’s necessary to analyze this business model according to existing laws and apply them.
Our SALT specialists identified that the company may have significantly overpaid California income taxes. Before they could seek any type of refund, Armanino needed to support a position that the company had overpaid their taxes. Determining the proper apportionment would require a full analysis of their revenue and the taxable jurisdiction where their audience resided.
The multimedia company engaged our SALT team to:
After the comprehensive sales sourcing project, Armanino determined that for 2019 and prior years:
While the company was overpaying in California, we determined that they were also under-filing and underpaying in some states where they did have jurisdiction. By establishing the correct apportionment for state tax liability and accurately filing the necessary returns, the company gained compliance and avoided the risk of penalties had they been challenged or audited.
This in-depth analysis paid off for the multimedia company, as they were able to significantly reduce their actual California tax liability, decreasing it by $1.65M between 2016 and 2019. If the apportionment methodology is correctly executed in future filings, the company has a prospective benefit of approximately $150K per year, depending on their taxable income in that year.
