“The first thing we do, let’s gank all the lawyers.”

Posted on January 6, 2006 by Scott Jennings| 33 Comments

Sources:

Ren Reynolds at Terra Nova looks at Linden Labs buying back the “devauled property” of some Second Life residents.

Julian Dibbell, in pole position for the “What the Hell Is Wrong With You” 2006 award, lets the IRS know MMOs exist.

David Edery analyzes possible legal pitfalls awaiting MMOs.

My view is that we’re all breathing just a *bit* too heavily. In my I-am-so-not-a-lawyer opinion, virtual worlds are roughly analogous to my living room. To wit, using Edery’s list:

* You have no constitutionally protected rights of free expression in my living room. If I tell you to get the hell out, you have to. If you don’t, I’m within my rights to call the police. Or alternately, if I live in Texas, just shoot you. (This tends to be a sore spot with me. I am more than a little tired of people demanding “civil rights” to be asshats in MMOs.)

* If someone else sexually harasses you in my living room at a party, it’s not really my fault, honest. I’m sorry I invited the schlub, but it is pretty much his or her fault here. Just because I own the living room doesn’t mean I’m legally responsible for every crime that happens (although I am for some – you can’t do drugs, and if you get drunk, and go driving, I could get sued. The legal parallels here are somewhat unclear.)

* It’s as legal for you to gamble in my living room as it is anywhere else.

* If you’re crashing in my living room, you don’t own it. No matter how long you stay there. Really.

* If a 10 year old is operating a brothel in my living room, there’s all sorts of laws that apply here.

See, this metaphor really works!

Yes, I played a lot of the above for laughs, but honestly, here’s what I think. Our (American) legal system is broken in a great many ways. Punitive lawsuits, legal effectiveness based on who can afford the best lawyers, etc. Our tax code is broken in similar ways. Pardon me if I’d prefer to postpone the day where we have to deal with both as long as possible. And once we do, I suspect you won’t like the results – because crushing legal and tax burdens will stifle any possible innovation deader than it already is.

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  • Kalain

    Our legal system is in pain right now due to the physical aspects of the laws. While I agree with you, that’s because we see the server as the living room. Lawmakers are confuzzled over this, as it used to be pretty cut and dry where events or crimes occured. Now it’s a question of was the event occuring on the client or the server for legal purposes, and it gets kinda wierd when each state is establishing these laws in some conflict of each other. Just look at what should be a rather simple question: What’s the legality of accessing someone’s wireless router. Some states consider it trespassing (as the router is physically on the person’s property), some states don’t consider it anything (as technically the person using it is not on the property).

    We need some serious reform, but at the very least Linden will eat a few civil suits over this, since it is directly interacting with real currency. Everyone else should be in the clear for a while. There are no civil rights in an MMO, and for the love of god random web board posters, READ the first ammendment before thinking all it says is “FREE SPEEEEEECH!”

  • http://edgecase.net/devsite Cael

    >I am more than a little tired of people demanding \’e2\’80\’9ccivil rights\’e2\’80\’9d to be asshats in MMOs

    Thank you! For finally expressing my own opinion but in words of less than four syllables – that posh English education can be a hazard sometimes – and therefore, providing a clause i fully to intend to insist be included in the ToS/EULA of our forthcoming VW.

    “You have no civil rights, especially not the right to be a complete asshat”. Not sure how much the lawyer will approve, but thank you anyway.

  • Neep

    I wonder how many delevopers would be left if you taxed in game income? That’d be a fun one to watch purely for the shit storm that would ensue.

  • Tom

    If they taxed in-game income then all my characters in WoW would instantly transform overnight into non-profit companies. All excess $$ and items would be donated to an in-game charity and written off for the full amount on my taxes.

    Really, though, would the IRS want to mess with gamers in this manner? These are people who figure out the best way to game EVERY system, and they’ll find holes in the IRS’ laws that the IRS never dreamed of.

  • http://scoregasm.blogspot.com Michael Neel

    On the idea of taxing gains earned in an MMO, I wonder if we can take it further. If the items and gold we aquire have a real monetary value that is taxable – but the EULA claims we do not own it but the company (i.e. Sony, Blizzard) does – wouldn’t that mean the company owns taxes as the players gain wealth? If that held, I suppose the company wouldn’t want to increase the total value of the game so that it didn’t occur taxes, except as maybe a one time earning. So MMOs would tend to have a tighter economy, zero-sum based in fact.

    Finally, a way to fix the broken economey systems of MMOs! File your taxes today!!!

  • Kalain

    So, if you exploit a mob for a kill and items, do you need to declare the items, or should you just get hit with tax evasion as well as LoS exploitation.

  • http://www.kriegergames.com/ bloo

    This is why I make games and don’t practice law.

  • xaldin

    Actually the living room analogy doesn’t work at all. The courts long ago decided that for profit businesses (MMO Company’s) had to play by different rules than private residences when it comes to what can and can’t go on or be done by such entities.

  • Noel

    On the idea of taxing gains earned in an MMO, I wonder if we can take it further. If the items and gold we aquire have a real monetary value that is taxable – but the EULA claims we do not own it but the company (i.e. Sony, Blizzard) does – wouldn\’e2\’80\’99t that mean the company owns taxes as the players gain wealth? If that held, I suppose the company wouldn\’e2\’80\’99t want to increase the total value of the game so that it didn\’e2\’80\’99t occur taxes, except as maybe a one time earning. So MMOs would tend to have a tighter economy, zero-sum based in fact.

    Not likely. Since most EULAs expressly forbid the selling of in-game wealth for virtual items, it would be easier for the company to pursue legal action against someone applying value (read: selling for real currency) to virtual items than it would for the IRS to pursue tax gains based on a property that people do not own.

    Since all items are “owned” by the studio/publisher, ownership is never truly transferred.

    I’m not an expert on lease taxation, but I don’t recall ever being taxed on rental cars or services. Item transfer for currency has long been attempted to be thrown under the loophole of ‘you’re not buying the item; you’re buying the time I put in to get the item’. Services aren’t taxed by the government, however, the person providing the service is taxed based on their business’ income.

    Thus, financial responsibility is either:

    1. Waived by the person selling the item. (Because the person is operating contrary to the EULA and selling a virtual item which they do not rightly possess – aka: stealing)

    2. Accepted by the person selling the ‘time to attain the item’. (The person is selling their time, and while services are not applied a sales tax by the government, the person’s ‘business’ income is taxable by the IRS.)

    At no point do the items acquire a physical, legal monetary value.

    Pursuing taxation law against the seller would be equivalent to asking someone who stole an item and sold to be held accountable for the income they received from the sale. Legally possible, but unlikely to be pursued unless all other legal possibility is exhausted in pursuit of the ‘criminal’. (see: Capone)

    Pursuing taxation against the studio/publisher would be equivalent to asking an electronics store to pay taxes based on the retail value of an item stolen from the store. Since the item was never legally sold, it never acquired “value”.

    Just my thoughts.

  • slog

    The IRS doesn’t care abut EULAs. At all.

  • slog

    oops almost forgot. the IRS doens’t care if the money is for your time or for a tangible item.

  • Kalain

    The basic concept of the legalaffairs article was that selling items on ebay should be taxed (true, it’s income, and technically a business income).

    Then he somewhat loses it, and thinks all earnings in an MMO are technically taxable, as they have monitary value outside the game (if someone’s selling it, someone must be buying it, thus you can establish the value of a gold piece, and attach a value to all gold or items worth gold in a virtual world, redeemed for read world cash or no.

    The place where it would fall apart would be the end of the game. If AC2 closed it’s doors under this concept, I’d no longer have access to my virtual property which I was taxed on. Would I be entitled to a cash payout from Turbine in that case for virtual property that is no longer usable? What if you ban someone?

    Basically, taxing income in the game would turn it into a huge legal issue if any items were ever taken away, someone scammed you out of 5g, the servers shut down, you get banned/suspended, etc. Because suddenly you’ve decided the virtual property IS yours, legally, and the EULA is void. Since if it wasn’t yours, the game company would be the ones paying taxes every time gold dropped off a mob. And that doesn’t make much sense at all.

    *sigh* This is just headache inducing in the number of issues it would cause. If you sell something for real world cash, you should be taxed on it. Even if it’s against the EULA to sell it, you did in fact make money off it. Though I dunno how you’d handle it if the item was deleted afterwords for violation of the EULA. But if you’re simply existing in a virtual world, taxation would be a complete monster as to who pays for what, when, and how. Plus, we’d all make Taxation without Representation guilds and demand that norrath get a senate seat.

  • TPRJones

    The living room analogy specifically breaks down because what’s really going on is you are charging someone for the right to access your livingroom, let’s say to do their fingerpainting in. And in the case of SL you are selling them a specific square foot of livingroom space (with it’s distance from the door being a determining factor of its value) and charging them monthly upkeep fees.

    So now if you kick someone out shouldn’t you have to give them back their pro-rated rent? And can they take their fingerpaintings with them or is it in your rights to keep them or throw them away? What about the SL problem, where you go and suddenly install doors all around the livingroom, and now the poor schlub you charged an arm-and-a-leg for to be by the door is shit out of luck?

    When you start charging money, it’s just not your livingroom anymore. It’s a business. That changes all the rules.

  • Brask Mumei

    Taxing in game wealth rather than the money made from the in game wealth doesn’t seem very likely. The gold piece in WOW is valueless until it is sold. If I were to paint a million dollar painting, I’m pretty sure I don’t have to declare it as income until it sells. (Indeed, until it sells for a million dollars, I’d contend it isn’t a million dollar painting :>)

    Taxing for services depends on your region. Canada has the Goods and Services Tax which will happily tax you 7% of all *service* transactions (such as haircuts, rental cars, etc). Note that charging the tax is only necessary if your gross income exceeds $30,000, so small time ebayers have nothing to fear.

    The people suggesting that there should be class-action lawsuits against SL depress me. These are the very people who most benefit from Linden Labs hard work, turning around to snap at the hand that feeds them.

    - Brask Mumei

  • =j

    Lets say that you give me a box of candy in your living room. Two days previously, I deposited some money in your paypal account. How can these two transactions be linked? Are either taxible?

    I swear it’s like some kind of demented CPA Exam question.

  • tazelbain

    I stand by my comments about people who play with a profit-motive spoil the game. The Lindens are getting an object leason in it, not that they didn’t encourage it.

  • http://www.damnedvulpine.com/ J.

    I fucking warned all you assholes about this shit. Years ago.

    “There can only be so many sellers and so many willing to buy before anything supposedly worth buying is already owned by someone who wants to keep playing.

    Then again, this could be the way the old balance between game fantasy and reality is resolved; conflicts will be resolved with real lawsuits as customers find companies really liable for their dissatisfaction.”

  • Douglas

    conflicts will be resolved with real lawsuits as customers find companies really liable for their dissatisfaction.

    Seriously. Reality check. If you are dissatisified with a company, do not buy their products. They’re not to blame if you continue to buy their product.

    This is something I don’t understand. If I buy a product, and it doesn’t meet expectations, I either a) return it, or b) eat the loss if it’s not returnable. The onus is on the consumer to make sure the product is right for him/her. Every company wants people to buy their product. The consumer has to decide for himself which is the right one for him.

    Nobody else can do it for him.

    Plat farmers ‘wrecking’ your play experience? Stop playing.

    His style of gameplay (solo/group/raid/lore/tradeskills/etc.) not supported? Stop playing.

    Decisions on game direction got him down? Stop playing.

    If it is not fun or entertaining for him, then do-not-play.

    Somewhere along the line, people got the idea that the MMO they were playing had to be perfect for them. Regardless of the game that the developer wanted to create, the game they’re playing must be perfect for them.

    The market is no longer UO and EverQuest.

    It’s UO, EverQuest, EverQuest II, World of Warcraft, EVE Online, City of Heroes, City of Villans, EverQuest Online Adventures, Planetside, Dark Age of Camelot, Asheron’s Call, Star Wars Galaxies, Guild Wars, Lineage I & II, Final Fantasy X, Matrix Online, Sims Online, and a host of others.

    If a gamer playing a game that he is no longer enjoying, no one is to blame for this but him. He cannot hold a company responsible for his inability to make a rational decision.

  • D-0ne

    Online poker. Online gambling and what occurs with the money won there.

    I suggest everyone look at how online gambling winnings are dealt with by the IRS.

    MMOG’s are going to be buried under laws designed for online gambling industry. Real world cash gained from MMORPGs is legally no different that winning money during online gambling. The law is what it is.

    People are going to have property rights in online games. There is no way to stop it unless the big boys of online gaming expand their network to include the online casinos.

  • Jessica Mulligan

    The IRS doesn’t really care where you get your money. If you have income, you are required to declare it and pay any relevant taxes on it. Theoretically, if someone pays you $100 to buy your old living room couch, you’re supposed to declare it. Practically, that kind of reporting pretty much never happens.

    Where it really breaks down is in tracking and enforcement; right now, the only way the IRS has of knowing of it is if you declare the income, unlike salary and wage withholding, where the company reports back. If the IRS wants to get nasty, it will require the likes of IGE and SOE to keep records of who sold what to whom and report the data back to the IRS.

  • http://www.corpnews.com Andrew Crystall

    Lum,

    I appreciate what you’re saying. But.

    But, it’s going to happen. We’re only now really entering the stage of the information era when things will start changing quickly. If you don’t consider and design to these issues, then they will turn round and bite you in the ass.

    EULA’s often make sweeping claims with no precident – especially in Europe – to back them up. Indeed, they are no different from other software EULA’s and similar claims (that you have, for example, no rights to a program you made which runs under a programing environment) have been repeatedly shot down.

    It’s not a sandbox anymore, Jim.

  • D-0ne

    Jessica,

    Online casinos are rquired by law to track and report winnings to the IRS.

    It’s only a matter of time before MMOG items sellers are required to report.

    Like it or not “phat loots” are a winnings in a game of chance and eventually some SOB will want to tax them.

  • slog

    I can’t belive I’m replying to D-One.

    MMOG sellers are already require to report. they just dont :)

    It’s going to be services that require it like playerauctions.com. If the service is in game (like EQ) then it will be required though.

  • D-0ne

    http://www.ige.com/about

    They do report earnings. What they do not report are the suppliers incomes.

    The people who are winning the gambling bets (payout at IGE) are not reporting their income. IGE certainly is reporting theirs.

  • http://www.damnedvulpine.com/ J.

    Seriously. Reality check. If you are dissatisified with a company, do not buy their products. They\’e2\’80\’99re not to blame if you continue to buy their product.

    This goes against 90 percent of the attitudes of consumers in America. If you don’t believe me, go man a register at a retail store. Bonus points if it’s a game store.

    There has been a rapidly growing sense of entitlement rising over the past 40 years, especially regarding access to entertainment. And organizations like IGE, RIAA and MPAA are doing their damnedest to close the gaps between money and entertainment. One day we’re going to wake up and under the law, they will be the same thing.

  • D-0ne

    J makes an great point and I’d like to add a question to his point.

    What’s the difference between a Music CD, a Movie DVD, a Gaming CD/DVD and an Software CD/DVD that is an OS and one that is a Productivity Software CD/DVD?

    If I write a document using MS Word and MS word is now an “online” service is the document mine or Microsofts?

  • TPRJones

    They do report earnings. What they do not report are the suppliers incomes.

    If that’s true, and they’re stationed in the US, then they are (at least partially) breaking the law.

    Any US corporation is required to report on a 1099-MISC any payments made to non-employee individuals and unincorporated businesses totalling $600 or more in a calendar year. There are some exceptions to how this works for certain types of payments (like gambling winnings), but nothing that would apply to IGE. Of course anyone they pay less than $600 in a year can get away with not reporting it, but if the IRS audits IGE and decides to check on the honesty of people they paid less than $600 to by crossreferencing against their tax returns, those people would be getting some interesting visits from Uncle Sam.

    There are plenty of legitimate loopholes to use to reduce your taxes. Reducing your taxes by not reporting income is just lazy and dangerous.

  • faefrost

    >On the idea of taxing gains earned in an MMO, I wonder if we can take it further. If the items and gold we aquire have a real monetary value that is taxable – but the EULA claims we do not own it but the company (i.e. Sony, Blizzard) does – wouldn\’e2\’80\’99t that mean the company owns taxes as the players gain wealth? If that held, I suppose the company wouldn\’e2\’80\’99t want to increase the total value of the game so that it didn\’e2\’80\’99t occur taxes, except as maybe a one time earning. So MMOs would tend to have a tighter economy, zero-sum based in fact.

    Actually the living room analogy holds up pretty well here as well. You buy the house the living room is in. Over the years the estimated value of said living room appreciates in value. However you do not get taxed on that appreciation until you choose to sell said living room and get real world currency for it.

    So you cannot be taxed for having an ultra rare uber stick of wombat slaying, but you can be taxed on the $$$ earned should you sell it for real world currency.

    Therefore this only becomes an issue for MMORPG companies if they choose to provide a mechanism for the transfer of virtual foozles for real world cash (ie Station Exchange). If they do that then in all liklihood they may be required to report who sold what and how much they recieved for doing so.

  • http://http0:www.thisisnotacommunity.org D 0ne

    I’ve lived in six differnet states. Every home I’ve ever lived in has had its value judged and taxes raised or lowered based on that judgement. The governemnt does not wait until you sell your home to tax its real value.

    Hell, I’ve seen old ladies forced to sell their homes due to tax increases on the property.

    It’s not just houses either. In states with personal property taxes, I’ve seen taxes go up based on value for all kinds of things. Cars, guns, coin collections…

  • Trathe

    All I have to say is this…

    If the IRS is going to audit my earning in EQII I want to claim a deduction on the Gibblegabber (what ever that money sink goblin lotto guys name). For gold lost. If you can claim real monies lost due to gambling then you should sure as hell be able to claim gold lost in game!!!!

    Rawr.

  • Ian

    Much adeu about nothing.

  • Turlow

    Some people seem to be confusing income tax and property tax. Property taxes are based on the value of property and is collected by state and local governments. Income taxes are based on income and are collected by state and local governments and the IRS. The IRS does not collect property tax.

    I imagine the IRS would consider in game items and gold similiar to property. When it comes to income tax, the value of property is irrelevant unless and until it is sold. If you buy a home for $100k and 10 years later it is worth $200k, you do not owe the IRS taxes on increased value. If you sell said propery for $190k, you owe income tax on $90k, or the money you made selling the property. Granted, I’ve over-simplified this some as there are many loopholes to reduce the amount of tax paid but the point is still valid.

    I don’t see state or local governments trying to tax in-game properties (items and gold) any time soon. The states can’t even work out a way to collect sales tax on internet purchases.

  • http://www.walkering.com Mark Wallace

    To get back to the asshat thing for a moment: I believe, in fact, that your interpretation of US liability law is mistaken here. In fact, the things that happen on your property are your responsibility, at least in many states. If someone slips on the ice in your driveway, you’re liable. If a tree on your neighbor’s property topples over and crushes the roof of your house, you’re liable, believe it or not. I don’t know about harrassment in your living room, but in many other areas, it’s the property owner who’s reponsible for whatever goes on on his/her property. Game companies are well aware that this is the direction the law tends to go in, or there wouldn’t be EULAs at all, there would just be a line stating, “Welcome to Asshat World, you’re on your own, don’t come crying to us.” Plus when you throw in the fact that you’re paying for access, as noted above, it’s more like being in a nightclub or something, and then I’m sure a host of other issues come into play.