Online Gaming and the Pay-To-Win Problem: Legal Deterrence or Industry Self-Regulation?

Loyola of Los Angeles Loyola of Los Angeles

Entertainment Law Review Entertainment Law Review

Volume 36 Number 3 Article 2

Spring 2016

Online Gaming and the Pay-To-Win Problem: Legal Deterrence or Online Gaming and the Pay-To-Win Problem: Legal Deterrence or

Industry Self-Regulation? Industry Self-Regulation?

Simone Darakjian

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Part of the Entertainment, Arts, and Sports Law Commons, and the Gaming Law Commons

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Simone Darakjian,

Online Gaming and the Pay-To-Win Problem: Legal Deterrence or Industry Self-

Regulation?

, 36 Loy. L.A. Ent. L. Rev. 213 (2016).

Available at: https://digitalcommons.lmu.edu/elr/vol36/iss3/2

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DARAKJIAN_FINALX2 (DO NOT DELETE) 5/31/2016 12:49 PM

213

ONLINE GAMING AND THE PAY-TO-WIN

PROBLEM: LEGAL DETERRENCE OR INDUSTRY

SELF-REGULATION?

SIMONE DARAKJIAN*

Online games that started off as games of luck, skill and patience

have been transformed into pay-to-win games. Players with the deepest of

pockets, who can purchase any in-game asset that would advance their

gameplay, win. The game is no longer a game. It is being destroyed by the

exploitation of commercial opportunities and the black market sale of in-

game assets. It is turning into a business, pure and simple, and is depriving

dedicated, skillful, and patient players of their expected in-game

experience. Moreover, players are regularly discovering and exploiting

new alleys through which to engage in these Real Money Trading (“RMT”)

transactions to avoid any transaction costs.

A number of scholars have addressed the initial question of whether

income is generated when in-game assets or currency are acquired. This

Note addresses the more recent development of the extensive trading of

these acquired assets or currency. Specifically, this Note addresses the

consequences of large scale acquisition of in-game assets and currency as a

business, and not as the byproduct of recreational activity. In doing so, this

note addresses possible solutions through state regulation, taxation, and

industry self-regulation. As the majority of RMT transactions occur

between foreign and US players, these transactions are taxable in very

limited circumstances. Therefore, this Note concludes that the most

plausible way to deter gold farming and RMT transactions may actually be

through industry self-regulation and not through legal means.

*J.D. candidate at Loyola Law School, Los Angeles, 2017. This Note is dedicated to

Arthur Hovsepian, whose love, patience, support, and PC gaming hobby made this Note a

possibility. Thank you for being my rock for the past ten years of my life. My utmost thanks to

Professor Katherine Pratt for not only agreeing to be my faculty advisor for this Note, but also for

her unending support and guidance; to my parents for their unconditional love and support

throughout my entire life; and to Patil Derderian for her invaluable friendship.

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214 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

I. INTRODUCTION

Online gaming initially invokes images of teenage boys, ensconced in

their computer chairs, hunched over a keyboard playing games. The reality

today, however, is that the acquisition and production of saleable assets

acquired through online games has become a huge international

profitmaking activity.

Throughout China, workers in single rooms toil

away in a clockwork fashion reminiscent of factory workers, trying to

generate in-game currency and assets that are then sold to U.S. players.

This practice, known as “gold farming,” along with various other

services offered by Chinese workers, is destroying online games. Online

games started off as games of luck, skill, and patience. Now, they have

transformed into games akin to free-to-download iTunes or Google Play

games that drown players in in-app purchases.

As such, online games

have been transformed into “pay-to-win” games. Players with the deepest

pockets, who can afford to utilize the services of Chinese gold farmers,

purchase in-game assets to advance their gameplay. The online gaming

industry has become a business, pure and simple. The exploitation of

commercial opportunities and the black market sale of in-game assets are

depriving dedicated, skillful, and patient players of their expected in-game

experience, and destroying the gaming environment.

Many online gamers engage in a practice known as Real Money

Trading (“RMT”), which allows them to purchase in-game items and

currency to advance their in-game characters. Some games, such as

Second Life,

allow and encourage players to engage in RMT.

Others,

1. See Nathan Gibson, 10 of the Most Expensive Virtual Items in Video Games,

THERICHEST (Nov. 15, 2014), http://www.therichest.com/rich-list/most-popular/10-of-the-most-

expensive-virtual-items-in-video-games/?view=all [http://perma.cc/YW3D-G29B] (topping the

list was an asteroid space resort in the sci-fi MMORPG Entropia Universe, which was sold

piecemeal for a total of US $635,000).

2. See Julian Dibbell, The Life of the Chinese Gold Farmer, N.Y. TIMES (June 17, 2007),

http://www.nytimes.com/2007/06/17/magazine/17lootfarmers-t.html [http://perma.cc/AE95-

ELUW] (describing the typical 12-hour work shift of a Chinese gold farmer, who earns an

effective wage of about 30 cents an hour).

3. See About In-app Purchases, APPLE, http://support.apple.com/en-us/HT202023

[http://perma.cc/YKD3-MZCJ] (“In-app purchases are extra content and subscriptions that you

can buy in apps on your iOS device or computer.”); see also Buy In-app Items, GOOGLE,

http://support.google.com/googleplay/answer/1061913?hl=en [http://perma.cc/6EMS-YME9]

(“Here are some examples of in-app purchases: a sword that gives you more power in a game, a

key that unlocks more features of a free app, virtual currency that can be used for purchases.”).

4. See What Is Second Life?, SECOND LIFE, http://secondlife.com/whatis/

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such as World of Warcraft (“WoW”) and Diablo III,

consider any form of

RMT as a direct violation of their terms of service and their virtual

“property” rights.

Regardless, about 24% of players in the U.S. and

around the world still engage in unauthorized RMT on a daily basis.

such, assuming the U.S. has jurisdiction to tax parties engaging in RMT,

these income-generating transactions give way to taxable income, which

the Internal Revenue Service (“IRS”) has been unable to monitor or

collect.

Furthermore, game developers have been unable, or perhaps

unwilling, to deter these transactions themselves.

[http://perma.cc/J4H5-HCKM] (describing itself as “the largest-ever 3D virtual world created by

[millions of] users” where “everyone you see is a real person and every place you visit is built by

people just like you”).

5. See Brett Linden, Buying and Selling Linden Dollars, SECOND LIFE (Oct. 15, 2015,

3:38 PM) http://community.secondlife.com/t5/English-Knowledge-Base/Buying-and-selling-

Linden-dollars/ta-p/700107 [http://perma.cc/CRN4-5LHZ] (“The unit of trade in Second Life is

called the Linden dollar or L$. You can purchase Linden dollars both inworld and online . . . .”).

6. See Diablo III: Introduction, BATTLE.NET, http://us.battle.net/d3/en/game/guide/get-

started/introduction [http://perma.cc/E2K3-VU26] (“Diablo III is an action role-playing game

that takes place throughout the dark fantasy world of Sanctuary. You play a hero who engages in

fast-paced combat that tests your reflexes and rewards tactical decisions. As you slay hordes of

monsters and challenging bosses, you grow in experience and ability, learning new skills and

acquiring items of incredible power.”).

7. See Battle.net End User License Agreement, BLIZZARD (Feb. 28, 2015),

http://us.blizzard.com/en-us/company/legal/eula.html [http://perma.cc/9SLU-76K5] [hereinafter

Battle.net EULA] (“Prohibited Commercial Uses . . . [include] gathering in-game currency, items,

or resources for sale outside of Battle.net or the Game(s) . . . [and] performing in-game services,

like power-leveling, in exchange for payment outside of Battle.net or the Game(s) . . . . Blizzard

is the owner or licensee of all right, title, and interest in and to the Battle.net Client, Battle.net, the

Games, Accounts, and all of the features and components thereof. Battle.net and the Games may

contain materials licensed by third-parties to Blizzard, and these third-parties may enforce their

ownership rights against you in the event that you violate this Agreement.”).

8. See Vili Lehdonvirta & Mirko Ernkvist, Knowledge Map of the Virtual Economy:

Converting the Virtual Economy into Development Potential, INFODEV 13 (Apr. 2011),

http://www.infodev.org/infodev-files/resource/InfodevDocuments_1056.pdf

[http://perma.cc/5X8V-FRVU].

9. See Anne Livesay, Will Gold Farming Become Taxable?, IRON REALMS ENTM’T,

http://www.ironrealms.com/will-gold-farming-be-taxed [http://perma.cc/6D8E-Q257].

10. See generally Thread: Why Can’t Blizzard Just Systematically Shut Down All the

Gold Selling Sites?, MMO CHAMPION, http://www.mmo-champion.com/threads/1191871-Why-

can-t-Blizzard-just-systematically-shut-down-all-the-gold-selling-sites/page3

[http://perma.cc/H9WK-KV8U] (discussing potential reasons for why Blizzard Entertainment, a

premier game developer, has not reacted toward the RMT phenomenon).

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216 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

In these virtual worlds, players are able to acquire in-game currency

and limited use in-game property.

Players create in-game assets by

developing in-game characters and player accounts.

Although RMT

seems to be an ever-growing occurrence, the IRS has yet to clearly respond

to its tax implications.

Game developers, while aware of the issue, do

little to hinder its occurrence.

Moreover, players regularly discover and

exploit new alleys to engage in RMT transactions to avoid transaction

costs, such as through the use of PayPal’s gifting system.

There have been varying proposals on how to address this gray area

of RMT in the U.S. tax code, but none provide complete solutions to the

problem.

Furthermore, scholars have addressed the initial question of

whether in-game assets or currency generate income at the time they are

acquired.

This Note addresses the more recent development of the

11. Limited in the sense that a player is only able to utilize these items within the game.

12. See, e.g., Diablo III: Introduction, supra note 6 (“As you slay hordes of monsters and

challenging bosses, you grow in experience and ability, learning new skills and acquiring items of

incredible power.”).

13. Jamie S. Switzer & Ralph V. Switzer, Taxation of Virtual World Economies: A

Review of the Current Status, 7 J. VIRTUAL WORLDS RES. 1, 1 (2014) (“[T]he Internal Revenue

Service has to date not offered any strong guidance regarding the issue [of virtual world

economies].”).

14. See Thread: Why Can’t Blizzard Just Systematically Shut Down All the Gold Selling

Sites?, supra note 10.

15. See, e.g., Josh, Warning! Do Not Sell Gold Via PayPal!, BATTLE.NET (July 21, 2012,

1:01 AM), http://us.battle.net/d3/en/forum/topic/6146725790 [http://perma.cc/BD67-32BE]

(warning players of his experience selling WoW gold using PayPal’s gifting system to avoid

transaction costs and violating Blizzard’s and PayPal’s EULA); see also Send and Transfer

Money at the Speed of Life, PAYPAL, http://www.paypal.com/us/webapps/mpp/send-money-

online [http://perma.cc/SRB5-6V7H] (“Send money to just about anyone using their PayPal email

address or mobile number and the money will go to their PayPal account.”).

16. See, e.g., U.S. GOV’T ACCOUNTABILITY OFF., GAO-13-516, VIRTUAL ECONOMIES

AND CURRENCIES: ADDITIONAL IRS GUIDANCE COULD REDUCE TAX COMPLIANCE RISK 17

(2013), http://www.gao.gov/assets/660/654620.pdf [http://perma.cc/W5VU-WJJT]

(recommending that the IRS “find relatively low-cost ways to provide information” to taxpayers

on the basic tax reporting requirements for virtual currencies).

17. See, e.g., Bryan T. Camp, The Play’s the Thing: A Theory of Taxing Virtual Worlds,

59 HASTINGS L.J. 1 (2007) (exploring at what point economic gain becomes taxable gain and

arguing for a “cash out” rule for determining gross income); Leandra Lederman, “Stranger Than

Fiction”: Taxing Virtual Worlds, 82 N.Y.U. L. REV. 1620 (2007) (same).

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2016] ONLINE GAMING AND THE PAY-TO-WIN PROBLEM 217

extensive trading of these acquired assets or currency. Specifically, this

Note addresses the consequences of the large-scale acquisition of in-game

assets and currency as a business, as opposed to the byproduct of a

recreational activity.

Part II of this Note presents and explains the concept of virtual

worlds, virtual currency systems in online gaming, and RMT. Part III

discusses previously proposed taxation solutions to RMT-generated

income. Part IV presents new possible solutions to the lack of deterrence

of RMT. More specifically, the discussion breaks down three different

solutions: (1) state regulation, (2) foreign and U.S. taxation, and (3)

industry self-regulation. Part IV begins by analyzing the monitoring and

compliance issues that state regulation may face. Next, it concludes that,

because the majority of RMT transactions occur between foreign and U.S.

players, these transactions are taxable in limited circumstances. Finally,

Part V asserts that the most plausible way to deter gold farming and RMT

transactions may actually be through non-legal means: industry self-

regulation.

II. VIRTUAL WORLDS AND RMT

A. Virtual Worlds

1. MMORPGs

With its launch in 1993, Doom paved the way for our current online

personal computer (“PC”) gaming environment.

For the first time,

players were able to participate beyond just one PC by setting up Local

Area Networks (“LANs”) to play in multiplayer mode with their friends.

Multiplayer PC gaming became a huge hit—people would gather, with

their PCs in tow, and have LAN parties.

Later on, with the emergence of

online games such as WoW, players were no longer required to connect to

18. See 20 Games That Changed Gaming Forever, PCWORLD (June 24, 2009),

http://www.pcworld.com/article/167229/20_games_that_changed_gaming_forever.html#slide21

[http://perma.cc/HK2A-LTJE] (“Doom was the wellspring that shaped the industry.”).

19. See How Can I Host a LAN Party?, WISEGEEK, http://www.wisegeek.com/how-can-

i-host-a-lan-party.htm [http://perma.cc/JTY9-SUVJ].

20. See id. (“Party goers are linked by a LAN, or local area network, and play the same

computer game, either cooperatively or competitively. . . . As gamers learned the fun of fragging

friends when they are within screaming distance, LAN parties became more popular.”).

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218 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

the same LAN to play in multiplayer mode.

These games, referred to as

Massively Multiplayer Online Role-Playing Games (“MMORPGs”),

transformed small LAN parties into “realms,” where hundreds of thousands

of players throughout the world are able to play and interact with one

another over the internet.

There are three general types of players in MMORPGs: casual

gamers, hardcore gamers, and for-profit gamers.

The most common type

of the three, casual gamers, play MMORPGs in their free time, taking the

time to enjoy the gameplay.

Hardcore gamers, on the other hand, play as

often as they can, likely for hours a day.

These gamers are the most

likely to do anything and everything they can to advance their position in

the game.

For-profit gamers treat these PC games as a business and play

them purely for profit-making purposes.

21. See What is World of Warcraft, BATTLE.NET, http://us.battle.net/wow/en/game/guide/

[http://perma.cc/RS69-HK45] (“World of Warcraft is an online game where players from around

the world assume the roles of heroic fantasy characters and explore a virtual world full of

mystery, magic, and endless adventure.”).

22. MMORPG, DICTIONARY.COM, http://dictionary.reference.com/browse/mmorpg

[http://perma.cc/7H4Z-FG9N] (“[M]assively multiplayer online role-playing game: any story-

driven online video game in which a player, taking on the persona of a character in a virtual or

fantasy world, interacts with a large number of other players.”).

23. See Chapter I: Getting Started, BATTLE.NET,

http://us.battle.net/wow/en/game/guide/getting-started [http://perma.cc/7A58-UHR7] (showing

that not only are players in the United States able to communicate with other U.S. players, they

are also now able to communicate with players from around the world); see also Realm,

WOWWIKI, http://wowwiki.wikia.com/wiki/Realm [http://perma.cc/JKC7-7D33] (describing

how game developers host realms on physical “servers” located across the globe (e.g., the US,

Australia, Europe, China, Brazil, and Korea)).

24. See Byron M. Huang, Walking the Thirteenth Floor: The Taxation of Virtual

Economies, 17 YALE J.L. & TECH. 224, 234 (2015).

25. See id. at 234–36. The following discussion of hardcore and casual gamers differs

from Mr. Huang’s in that this Note asserts that hardcore gamers are more likely than casual

gamers to engage in RMT and purchase in-game items. Casual players play the game simply for

enjoyment sake and are not as concerned about winning compared to hardcore gamers.

Therefore, this Note assumes that because hardcore gamers are more dedicated to being the best

at the game, they are more likely than casual players to purchase in-game items to progress more

quickly in the game.

26. See id.

27. See id.

28. See id. at 235; see also, How To Make Money Selling Virtual Gold as a WoW Gold

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In MMORPGs, players create an account, usually tied to an email

address, and are then able to choose and name their character(s) as whom

they will play.

For example, Jane, a casual player, signs up for WoW and

selects a realm she wishes to play in based on her time zone.

Only

players from the same realm are able to interact with one another, so she

must make sure she is playing in the same realm as her friends.

She is

now able to choose her character’s race and class.

As there are two

opposing “factions,” Horde and Alliance, Jane must choose a race in the

faction she wishes to join.

Jane’s friends are in the Alliance, so Jane

chooses a female Night Elf—one of the Alliance races—to be able to play

with her friends as a team.

Next, Jane must choose a class to determine

her Night Elf’s abilities.

Of the nine classes available to Night Elf

Farmer, MONEYPANTRY (May 25, 2015), http://moneypantry.com/make-money-selling-virtual-

gold/ [http://perma.cc/K485-585S].

29. Some players have multiple characters on an account, which requires more time and

effort, to build each character up to their full potential. Furthermore, some players have multiple

accounts, on different email addresses. See Create a Free Account, BATTLE.NET,

http://us.battle.net/account/en/creation/tos.html [http://perma.cc/S6LE-2AG7].

30. See Chapter I: Getting Started, supra note 23; see also Realm, supra note 23 (“A

realm is an instance of the World of Warcraft game. Realms are hosted on physical devices called

servers. To play, you must first choose a server (realm) to play on. You then connect to this

realm over the internet.”).

31. See Chapter I: Getting Started, supra note 23.

32. See id. Some examples of races are: Night Elf, Gnome, Human, and Dwarf. Some

examples of classes are: Warrior, Hunter, Rogue, and Warlock. Each race and class has specific

attributes. Players can decide which race and class appeals to them the most in their selection

process. For example, a priest would be an ideal character to be a healer. Healers help heal their

friends and themselves if they take damage during monster fights.

33. See What Is World of Warcraft, supra note 21; see also Races, BATTLE.NET,

http://us.battle.net/wow/en/game/race/ [http://perma.cc/R2BF-GW7G] (showing that the Horde

races tend to be “darker” creatures such as Goblins, Orcs, and the Undead).

34. Players are likely to choose a faction based on whether or not they already know other

players in that faction. As WoW and other similar games require players to form groups to

complete certain tasks, it is easier for players to go into the game knowing they already have a

group rather than hoping they are able to befriend other players in-game. See Honor_Bound, Why

Are YOU Alliance or Horde?, REDDIT,

http://www.reddit.com/r/wow/comments/2l3gnk/why_are_you_alliance_or_horde/

[http://perma.cc/BF4V-P8Q9].

35. See Chapter I: Getting Started, supra note 23.

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220 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

players, Jane chooses to be a hunter

and begins her adventure with low-

level weapons and armor.

Throughout the game, Jane will use her skills and abilities to perform

and complete quests to unlock even more skills and abilities.

Furthermore, completing these tasks will build her character’s endurance.

This will allow Jane to participate in more challenging tasks that bear

higher-level prizes, such as more powerful weapons and durable armor,

otherwise known as “loot.”

The more time and effort Jane puts into the

game, the stronger and more durable her character becomes, which gives

her more chances to collect better equipment and acquire new skills.

Often, Jane will need to perform in-game tasks with her friends to

collect the best weapons and armor.

Jane and up to four of her friends

will venture into dungeons, where monsters become much more difficult to

kill than those Jane encounters during her solo quests.

Moreover, these

monsters drop higher quality loot.

To collect even better loot and level up

her character more quickly, Jane must also participate in raid groups that

consist of ten or twenty-five players depending on the difficulty of the

raid.

These raids, at times, take hours or even days to complete.

such, raiding in WoW also produces the best in-game items.

36. See Races of World of Warcraft: Night Elf, BATTLE.NET,

http://us.battle.net/wow/en/game/race/night-elf [http://perma.cc/L3Z3-QD93].

37. See Chapter II: How to Play, BATTLE.NET,

http://us.battle.net/wow/en/game/guide/how-to-play [http://perma.cc/6L4Y-KQ92].

38. See id.

39. See id.

40. See id.

41. See What Is World of Warcraft, supra note 21.

42. See id.

43. See id.

44. See Yarini, Which Raid Lasted the Longest?, REDDIT,

http://www.reddit.com/r/wow/comments/2wp5tc/which_raid_lasted_the_longest/

[http://perma.cc/MN5V-ZNWD] (compiling data on the length of time it took to complete certain

raids).

45. See What Is World of Warcraft, supra note 21.

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2. ARPGs

Unlike MMORPGs, Action Role Playing Games (“ARPGs”) are

usually single-player games.

As such, Diablo III, an ARPG, does not

have factions like WoW.

ARPGs ask players to choose a class, such as a

Wizard or Monk.

Even so, some games allow players to also form and

play in small groups.

For example, similar to dungeons in WoW, Diablo

III players can join up to three additional players to complete in-game

quests.

They can either join a “Public Game” with strangers or create

their own groups with people from their “Friends List.”

While in a group,

players may chat and trade items with one another.

Loot, which includes

both in-game items and currency, is earned by killing monsters.

Loot

earned while playing in groups is separated for each individual player,

possibly to prevent each player from “stealing” items from the other

players in the group.

Players are then able to trade items that their

characters perhaps cannot use, or already have, with any member of their

group.

46. See A Brief History of Western Action RPGs, HARDCORE GAMING 101 (May 27,

2011), http://blog.hardcoregaming101.net/2011/05/brief-history-of-western-action-rpgs.html

[http://perma.cc/J58L-WJHT].

47. See id.

48. See What is Diablo III?, BATTLE.NET, http://us.battle.net/d3/en/game/what-is

[http://perma.cc/HR67-KLHR].

49. See Playing with Friends, BATTLE.NET,

http://us.battle.net/d3/en/game/guide/gameplay/playing-with-friends [http://perma.cc/HP7G-

MF8T].

50. Id.

51. Id.

52. Id.

53. See id.

54. See id.

55. Playing With Friends, supra note 49.

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222 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

B. Virtual Currency Systems

As is evident by the above discussion, the aforementioned games

have some form of virtual currency, which in most cases is referred to as

“gold.”

Online gaming environments generally have one of three virtual

currency systems that dictate the method of exchange of that currency:

closed-flow systems, open-flow systems, and hybrid systems.

1. Closed-flow

In a closed-flow system, virtual currency is only exchangeable for

virtual goods and services, and vice versa.

Most MMORPG and ARPGs,

such as WoW and Diablo III, operate using a closed-flow system.

Even

so, in 2015, WoW created a quasi-closed-flow system where players are

able to purchase what is known as a WoW Token, for real money, through

the game itself.

They are then able to put their purchased WoW Tokens

up for sale in the in-game Auction House in exchange for gold earned by

killing monsters in-game.

The player who sold the WoW Token will now

have indirectly purchased gold through the game.

Players can then use

virtual currency to purchase weapons or repair their character’s damaged

armor after a grueling battle with monsters or bosses.

Conversely,

56. See, e.g., What Is World of Warcraft, supra note 21.

57. U.S. GOV’T ACCOUNTABILITY OFF., GAO-13-516, VIRTUAL ECONOMIES AND

CURRENCIES: ADDITIONAL IRS GUIDANCE COULD REDUCE TAX COMPLIANCE RISK 4–5 (May

2013), http://www.gao.gov/assets/660/654620.pdf [http://perma.cc/W5VU-WJJT].

58. Id. at 4.; Jeffrey Anand, Note, Virtual Economies Virtually Unregulated: How Clear

Taxpayer Guidance Can Mitigate Tax Compliance Risks, 43 HOFSTRA L. REV. 253, 265 (2014).

59. See Battle.net End User License Agreement, BLIZZARD (Feb. 28, 2015),

http://us.blizzard.com/en-us/company/legal/eula.html [http://perma.cc/9SLU-76K5] [hereinafter

Battle.net EULA].

60. Introducing the WoW Token, BATTLE.NET,

http://us.battle.net/wow/en/blog/18141101/introducing-the-wow-token-3-2-2015

[http://perma.cc/3AHH-J6S3].

61. Id.

62. Id.

63. Id.; see Repair, DIABLO WIKI (Aug. 24, 2013, 3:15 AM),

http://diablo.gamepedia.com/Repair [http://perma.cc/9PG7-TFQ4].

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players who purchased the WoW Token through the Auction House may

redeem it to add thirty days of free gameplay to their WoW account.

Although some of these games allow players to directly purchase virtual

currency through the game using real money, like WoW,

this currency

cannot then be sold back or sold to other players for real money without

violating the terms of service.

2. Open-flow

In an open-flow system, virtual currency is exchangeable for U.S.

dollars, real goods and services, and virtual goods and services.

While

games such as Second Life allow players to sell in-game currency for real

money through their own virtual exchange system,

or through third

parties such as PayPal, most MMORPGs or ARPGs do not allow such

transactions to occur.

3. Hybrid

Finally, in a hybrid system, real money is exchangeable for virtual

currency. Virtual currency is exchangeable for both real and virtual goods

and services, and vice versa.

While there is no game or RMT transaction

64. Introducing the WoW Token, supra note 60.

65. Id.; see also Melissa Loomis, Fixing the Economy: How World of Warcraft is Trying

to End Gold Farming, GAME RANT (Apr. 15, 2015), http://gamerant.com/world-of-warcraft-end-

gold-farming/ [http://perma.cc/JY8H-KV4S].

66. See Battle.net EULA, supra note 59.

67. U.S. GOV’T ACCOUNTABILITY OFF., supra note 57, at 5; Anand, supra note 58, at

267.

68. See, e.g., Brett Linden, Buying and Selling Linden Dollars, SECOND LIFE (Oct. 15,

2015), http://community.secondlife.com/t5/English-Knowledge-Base/Buying-and-selling-Linden-

dollars/ta-p/700107 [http://perma.cc/UN34-GFYZ] (“The LindeX is the official virtual exchange

of Second Life run by Linden Lab where you can: [b]uy Linden dollars for the current market

rate[,] [m]ake limit buy offers at a requested exchange rate (or better)[, and] [s]ell Linden

dollars.”).

69. See Anand, supra note 58, at 265 (“Most virtual worlds are classified as closed-flow

systems.”); Battle.net EULA, supra note 59.

70. U.S. GOV’T ACCOUNTABILITY OFF., supra note 57, at 4; Anand, supra note 58, at

265–66.

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224 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

system that perfectly fits into this category, RMT transactions between

players and third parties such as gold farmers are likely to be the closest

example. The difference between the current RMT environment and a

hybrid virtual currency system is that players do not currently use virtual

currency to purchase real goods and services from third parties.

They do,

however, exchange real money for virtual currency, and both real money

and virtual currency for virtual goods, such as weapons and virtual services

such as power-leveling.

The following section will provide a more

precise explanation of the phenomenon.

C. RMT

Real Money Trading is a process that usually takes place between

online virtual world players and players who are dedicated “gold

farmers.”

Although in much smaller numbers, RMT may also occur

between players.

Most in-game gold farming occurs in China.

Chinese gold farming

companies have anywhere from ten to one-thousand employees working

twelve-hour shifts to collect gold and items to sell to Western players for

real world money.

Although many U.S. players also farm items and gold,

71. See SwootCandy, Gold…What To Do With It?, BATTLE.NET,

http://us.battle.net/d3/en/forum/topic/16202110050 [http://perma.cc/52G5-7EDL] (expressing

ideas for new, expensive in-game goods because gold is acquired so easily that players do not

know what to spend it on).

72. See WoW Powerleveling, PLAYERAUCTIONS, http://www.playerauctions.com/wow-

power-leveling/ [http://perma.cc/PE2D-FEUD] (providing a forum in which players can pay real

money for someone else to play their character until a desired level is reached); WoW Items,

PLAYERAUCTIONS, http://www.playerauctions.com/wow-items/ [http://perma.cc/B7LK-HLAD]

(providing a forum in which players can pay real money for another player’s virtual items).

73. See Stephen Totilo, Documentary Reaps Truth About Game’s Controversial ‘Gold

Farming’, MTV NEWS (Nov. 15, 2006), http://www.mtv.com/news/1545919/documentary-reaps-

truth-about-games-controversial-gold-farming/ [http://perma.cc/3AVW-XS4K].

74. Gold Farmer, WOWWIKI, http://wowwiki.wikia.com/wiki/Gold_farmer

[http://perma.cc/MHJ8-M4CV] (“China’s abundant labor, availability of high-speed Internet

connections and cheap computers have made it a powerhouse in collecting virtual assets for

online games, fueling the market among the 30 million or so online gamers worldwide.”); Julian

Dibbell, The Life of the Chinese Gold Farmer, N.Y. TIMES (June 17, 2007),

http://www.nytimes.com/2007/06/17/magazine/17lootfarmers-t.html [http://perma.cc/AE95-

ELUW] (estimating 100,000 Chinese gold farmers were employed in 2007 to produce the bulk of

all the goods in the global RMT industry).

75. Dibbell, supra note 74.

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there are currently no U.S. gold farming companies,

likely due to

property-related issues with virtual items and currency. There are,

however, companies based in Hong Kong with employees based at branch

offices in Europe and the U.S.

1. What is RMT?

Hours (or days) of raiding are not for the faint of heart—not every

player is able to expend the time and effort needed away from his or her

real-world life. As such, players attempt to obtain the best gear and loot

through less time consuming channels. RMT is a transaction in which

players use real money to purchase in-game currency and in-game items,

such as swords and armor, from other players or gold farmers.

As most

games operate in closed-flow economies, players turn to gold farmers to

engage in limited open-flow. These transactions are limited because RMT

only involves the trading of virtual items, currency, and services for U.S.

dollars and not for real goods and services as they would in traditional

open-flow economies.

While games can build RMT into their gaming environments, the

high volume of cheaper “black market” RMT options through Chinese gold

farmers and others makes these transactions less likely to occur or generate

76. While there are many individual players in the U.S. who do farm for gold, to the best

of this author’s research, there are no companies—incorporated or not—that employ gold farmers

operating in or from the United States. See William Alexander, How to Make Thousands of

Pounds a Month Playing Computer Games, VICE (May 8, 2013),

http://www.vice.com/en_uk/read/i-make-thousands-of-dollars-a-month-from-playing-computer-

games [http://perma.cc/83YK-9GTZ] (interviewing a 17-year-old American gold farmer who

makes $10,000 a month farming gold in RuneScape); cf. Julian Dibbell, Owned! Intellectual

Property in the Age of eBayers, Gold Farmers, and Other Enemies of the Virtual State Or, How I

Learned to Stop Worrying and Love the End-User License Agreement, in THE STATE OF PLAY:

LAW, GAMES, AND VIRTUAL WORLDS 137 (Jack M. Balkin & Beth Simone Noveck eds., 2006)

(discussing the 2002 case of Blacksnow Interactive, a now-disbanded company that was based in

California and had employed gold farmers in Tijuana).

77. See, e.g., FAQ, PLS, http://www.power-leveling-service.us/faq.html

[http://perma.cc/75SN-44LF] (“Live support is in Hong Kong, [and] the levelers are in European

and US branch offices of our company.”).

78. See Real Money Trading (RMT), SQUARE ENIX, http://support.na.square-

enix.com/faqarticle.php?id=20&kid=12802 [http://perma.cc/V6HN-J8YC].

79. See id. (“Real Money Trading (RMT) is the sale of in-game items, currency,

characters, or other data to obtain real money.”).

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large amounts of revenue.

Even though some games offer in-game

auction houses,

the items and currency for sale on third party websites are

usually cheaper.

Players utilize these RMT transactions to purchase in-

game currency, in-game items, power-leveling services, or even full

accounts with multiple high level characters.

Most game End User

License Agreements (EULAs) expressly prohibit the selling and buying of

in-game items and currency. In turn, players run the risk of being banned

from games and losing their accounts.

Nevertheless, players forgo using

in-game auction houses and exchange services (which are usually safer),

where purchases are likely guaranteed through the game developers.

Instead, players still choose to use these “black market” websites that

clearly violate game EULAs because they provide a better return.

a. In-game Currency

Sometimes, players are able to obtain in-game items from other

players by trading the equivalent value of in-game currency.

For

example, Jane might trade for a crossbow for her Hunter Night Elf in

exchange for the estimated value in gold. However, as Jane only casually

plays WoW, she does not have enough gold to trade for the crossbow.

Desperate for the shiny new crossbow, Jane turns to Chinese gold farmers

to obtain the necessary gold. These farmers—either by using hacks or

80. See, e.g., Battle.net EULA, supra note 59 (lacking an in-game RMT system).

81. See, e.g., Blizzard Entertainment, Diablo III Auction House Update, BATTLE.NET

(May 1, 2012), http://us.battle.net/d3/en/blog/5270376 [http://perma.cc/X57M-A985] (explaining

that Diablo III’s Real Money Auction House was a short lived attempt at an in-game trading

system).

82. See Veanna, How Much Gold Would You Pay for a Game Token?, BATTLE.NET (Mar.

24, 2015), http://us.battle.net/wow/en/forum/topic/16774527320 [http://perma.cc/5AJR-KHUW]

(stating that 1,000 gold in WoW would cost a player $1000); see also EPICTOON,

http://www.epictoon.com/ [https://perma.cc/36DN-PEEF] (explaining that a player is able to

purchase 50,000 WoW gold for use on a U.S. server for less than $20).

83. See WoW Accounts, PLAYERAUCTIONS, http://www.playerauctions.com/wow-

account/ [http://perma.cc/5MAC-QJ7E] (displaying various tabs labeled Gold, Accounts,

Powerleveling, Items, Guides, CD Keys).

84. See, e.g., Battle.net EULA, supra note 59.

85. See, e.g., EPICTOON, supra note 82.

86. See Trade, WOWWIKI, http://wowwiki.wikia.com/wiki/Trade [http://perma.cc/8H7Y-

QUHN?type=image].

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“bots” to automatically kill monsters and collect gold, or by manually

killing monsters that drop gold—farm this gold during their twelve-hour

workdays, and sell it through their third party websites.

Players then use

the gold they purchase from these gold farmers to purchase in-game items

that would advance their gameplay by increasing the strength and

durability of their characters.

Jane does a simple Google search for “WoW gold” and her computer

browser is suddenly inundated with hundreds of websites selling WoW in-

game currency for real U.S. dollars.

Jane selects a link, epictoon.com,

and goes to the website where she may then purchase gold. Jane selects her

game (WoW), the server on which she plays, and the amount of gold she

wishes to purchase.

Jane then purchases 1,000,000 gold for around

$400.

Although MMORPGs usually have different servers to cater to

players in different time zones,

many international players often play on

U.S. servers.

With over 157 million active players in the U.S., it is no

wonder many Chinese gold farmers choose to play on U.S. servers to build

their clientele.

Due to the constant interaction between players, these

gold farmers are able to sell directly to players in-game, as opposed to

87. See, e.g., IGE, http://www.ige.com/ [http://perma.cc/FB8Z-WLJM].

88. See What is World of Warcraft, supra note 21 (“[Y]our character progresses and gets

stronger as you gain experience, new skills, and more powerful items and equipment.”).

89. See, e.g., IGE, supra note 87; EPICTOON, supra note 82; WoW Gold,

PLAYERAUCTIONS, http://www.playerauctions.com/wow-gold/ [http://perma.cc/F7UM-DPD9].

90. See EPICTOON, supra note 82.

91. See id. This price regularly fluctuates, but remains around the $400 mark. To

generate a price, the page asks you to select a game, then a server, and then the amount of gold

you would like to purchase.

92. See Realm Status, BATTLE.NET, http://us.battle.net/wow/en/status

[http://perma.cc/5YT9-U2KF] (listing all available WoW realms).

93. See Zappera, Non-US Players Playing on US Servers, Do your Non-US Credit Cards

Work for Payment?, REDDIT (Mar. 19, 2015),

http://www.reddit.com/r/wow/comments/2zkswu/nonus_players_playing_on_us_servers_do_your

_nonus/ [http://perma.cc/BU2A-5VQH].

94. Country Ranking 2012: Active Video Game Players and Payers, STATISTA,

http://www.statista.com/statistics/195768/active-video-game-players-and-payers-in-selected-

countries/ [http://perma.cc/X7X4-KHJC?type=image].

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228 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

hoping for players to find their gold farming websites through a Google

search.

On the other hand, as ARPG players do not interact with one another

as often as they would in MMORPGs, more ARPG players seek out gold

and item farmers through online forums or dedicated gold farming websites

as opposed to seeking out these items from their fellow players.

Unlike

gold farmers, whose business it is to sell in-game currency, players do not

usually engage in RMT as farming currency is very time consuming and

would take away from actual gameplay.

Nevertheless, it is also possible

to engage in RMT on a player-to-player basis for both MMORPG and

ARPG games.

b. In-game Items

As discussed above, the best in-game items require much effort to

obtain.

As such, players like Jane might not be willing to give up the fruit

of their labor, no matter how much gold they are offered. Therefore, Jane

may also directly purchase in-game items, such as weapons and pets, from

the same companies who farm gold.

These items will aid her in fighting

higher- level monsters or bosses that in-turn drop better and more valuable

items.

100

Furthermore, unlike gold, players may also purchase items from

95. See, e.g., DIABLOIIIGOLD.COM, http://www.diabloiiigold.com/

[https://perma.cc/2KNZ-KU7G].

96. See Ozryk, Comment to Gold Farming?, BATTLE.NET (Feb. 9, 2016),

http://us.battle.net/wow/en/forum/topic/20742314411#1 [http://perma.cc/3EBM-NNLW] (“My

tip is to advise you not to [farm gold]. Farming gold is work, and if you’re going to work for

gold, you may as well do it at a rate that’s not a complete waste of your time. One WoW token

goes for about $37k gold. Assuming you can farm a very efficient 5k gold per hour, that’s over 7

hours to earn $20.00. That means you’re working for just over $2.85/hr. For reference, the

[2016] federal minimum wage for non-tipped workers is $7.50 [per] hour.”).

97. See WoW Gold, supra note 89.

98. See supra Part II.A.

99. See, e.g., Diablo III Items, DIABLOIIIGOLD.COM,

http://www.diabloiiigold.com/powerleveling/diablo3-items.html [http://perma.cc/2KNZ-KU7G]

(listing in-game items for sale such as Green Random Legendary Armor and a Hellfire Ring).

100. See Diablo III: Game Difficulty, BATTLE.NET,

http://us.battle.net/d3/en/game/guide/gameplay/game-difficulty [https://perma.cc/EK4V-

SANQhttps://perma.cc/EK4V-SANQhttp://perma.cc/EK4V-SANQ] (“In general, monsters in

higher difficulties . . . are tougher and their attacks are mor devastating. However, greater gold,

experience, and item rewards await you on the higher difficulties.”).

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other players who have acquired them while playing the game, as opposed

to those who deliberately farm these items. Purchasing items from players

involves a different process than purchasing through gold farming

websites, as players usually do not have their own websites through which

they can facilitate sales.

101

c. Power-Leveling

Many companies that farm gold also offer power-leveling services to

quickly “level up” players’ characters so that players may enjoy the perks

of playing the game at higher levels, without spending the necessary time

and effort to reach those higher levels.

102

Unlike in-game items or in-game

currency, players do not usually receive any form of virtual property from

these transactions.

103

Once a player pays for the power-leveling service

through a company’s website, employees, similar to gold farmers, log onto

a player’s account and play their character for them until they reach the

player’s desired level.

104

For example, PLS, a power-leveling service,

charges WoW players $125.87 to level up a level 1 character to a level 100

character in six days and three hours.

105

d. Accounts

Each player in a game has his or her own account, usually linked to

his or her email address.

106

Unless a player chooses to form separate

101. Players are able to purchase items using a third party website such as PlayerAuctions

to purchase items directly from other players, as opposed to purchasing them through gold

farming websites. See WoW Items, supra note 72.

102. See, e.g., Game Powerleveling, YGS YOYO GAME STORE,

http://www.mmopowerlevel.net/powerleveling.php [http://perma.cc/JR8W-QW96]; see

Powerleveling, DIABLOIIIGOLD.COM, http://www.diabloiiigold.com/powerleveling

[http://perma.cc/S2RG-BARY]; World of Warcraft US Power Leveling, PLS,

http://www.plsgamemall.us/wow-world-of-warcraft-gold-us-powerleveling.html

[https://perma.cc/N8HD-NPFQ].

103. This depends on the arrangement between the player and the power-leveling

company. If they have agreed that the player will keep any item that the “power-leveler” picks up

from killing monsters while leveling the player’s character(s), then the transaction will also

include the gain of virtual property.

104. See, e.g., World of Warcraft US Power Leveling, supra note 102.

105. See id.

106. See Create a Free Account, supra note 29.

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230 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

accounts for each character, all of the characters are tied to a single

account. Both gold farmers and ordinary players regularly sell valuable

accounts with multiple high-level characters and rare items.

107

Much like

buying and selling items and gold, purchasing another player’s account can

lead to the banning of that account.

108

To the dismay of players who

purchase these accounts, developers are able to detect an account transfer

more easily than the RMT of items or gold, because other players in the

game may realize that there is a new person playing the account and report

them to the developer.

109

Therefore, these RMTs are much riskier than

other forms of RMT.

2. Forms of RMT

a. Direct from Gold Farming Websites

Gold farming websites are solely dedicated to selling gold, accounts,

and other in-game items.

110

Players pay gold farming websites directly and

farmers then “trade” currency or items within the game.

111

This trade is

done through the game itself.

112

Players are allowed to trade items and

currency with other players through an in-game trading system.

113

Each

gold farmer uses their own character to farm the gold and items, and trade

with customers within the game.

114

As such, gold farmers and regular

players are mostly indistinguishable in-game. Some gold farmers utilize a

107. See WoW Accounts, supra note 83.

108. See Battle.net EULA, supra note 59.

109. See, e.g., Tenfoottall, Sold Account, BATTLE.NET,

http://us.battle.net/wow/en/forum/topic/7763736517#1 [http://perma.cc/6TKG-CL8R] (asking

game developers to ban an account that was sold on Craigstlist.com).

110. See, e.g., IGE, supra note 87; PLS, http://www.plsgamemall.us/

[http://perma.cc/48NG-FV3U].

111. See World of Warcraft Gold US Delivery Method, PLS,

http://www.plsgamemall.us/wow-world-of-warcraft-gold-us-gold.html#faq1500

[http://perma.cc/R6T3-5XNW] (“Face to Face: Before you select face to face delivery method,

please confirm your character name and realm in game.”).

112. See id.

113. See Trade, supra note 86.

114. See World of Warcraft Gold US Delivery Method, supra note 111.

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“bot,” a third party application that allows the character to automatically

farm for gold and items with little to no effort on the part of the farmer.

115

Players may be able to detect if a player is utilizing a “bot” if, for example,

a player does not respond to any messages, or is continuously in the same

location, performing the same tasks over and over.

116

This too, however, is

not always a reliable way to distinguish a for-profit gold farmer from an

ordinary player because ordinary players also sometimes engage in this

activity to advance their own characters.

117

b. Forums

Because the only way to receive an item or gold is to trade in-game

with other players, much of RMT is based on trust. Players use online

forums to rate the reliability of RMT with various gold farmers and with

fellow players.

118

This provides players with a feeling of security, as for-

profit gold farmers would not risk the reputation of their gold farming

enterprises to get away with scamming a few clients out of the promised

gold or items. Once a player has found a gold farmer he or she feels

comfortable trading with, the player transfers real money funds to the gold

farmer who then gives the item or gold to the player in the game.

119

115. See Wildbomb, Possible Gold Farming Bots?, BATTLE.NET (Mar. 16, 2013),

http://us.battle.net/wow/en/forum/topic/8197762001 [http://perma.cc/D4AV-P6SU] (noticing the

same group of level 80 hunters in the same spot for twelve hours).

116. See Frejya, Comment to Possible Gold Farming Bots?, BATTLE.NET (Mar. 16,

2013), http://us.battle.net/wow/en/forum/topic/8197762001 [http://perma.cc/D4AV-P6SU]

(suggesting that someone “whisper” to a suspected bot to see if there is a human response).

117. See Emeraldreamx, Good Gold Farming Guides?, BATTLE.NET (Feb. 14, 2015),

http://us.battle.net/wow/en/forum/topic/16353325354 [https://perma.cc/Y226-PYKJ] (asking

players their opinion of the best spots for farming gold).

118. See Reputation, Feedback & Honors, PLAYERAUCTIONS,

http://www.playerauctions.com/help/reputation-feedback-honors/ [http://perma.cc/2DE4-39LV].

(explaining that players who regularly engage in RMT outside of the games are able to rate one

another and make decisions on whether or not to purchase from a player based on a players

ratings and feedback from previous RMT transactions).

119. See Making Your First Purchase, PLAYERAUCTIONS,

http://www.playerauctions.com/help/content/making-your-first-purchase/ [http://perma.cc/C5YJ-

9KMQ].

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232 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

c. Player-to-player

Many ordinary players sell their WoW accounts using websites such

as PlayerAuctions.com.

120

For example, players can purchase a level 90

Hunter Starter Account for $25, a God Account with ten level 100

characters and rare items for $15,000, or a wide variety of other accounts

available within those two price ranges.

121

3. Exploitation of PayPal

a. Gold Farmers

Aside from having their own websites dedicated to selling in-game

items and currency, many gold farmers also use PayPal’s gifting system.

122

Gold farmers use this system to sell gold or items and to avoid transaction

fees associated with websites like eBay that utilize PayPal to tender

payment.

123

Similar to other methods of buying and selling in-game items,

players “gift” money to other players or for-profit farmers.

124

Those sellers

then transfer the items to their buyers, through the in-game trading

process.

125

This process not only aids in limiting transaction costs, but also

acts as a means of tax evasion, as it reclassifies a clear sale into the transfer

of a gift.

126

120. See WoW Accounts, supra note 83.

121. See id.

122. See PayPal Fees, PAYPAL, http://www.paypal.com/webapps/mpp/paypal-fees

[http://perma.cc/869W-5JH8]; Josh, Comment to Warning! Do Not Sell Gold Via PayPal!,

BATTLE.NET (July 21, 2013, 1:01 AM), http://us.battle.net/d3/en/forum/topic/6146725790

[http://perma.cc/BD67-32BE] (warning players of his experience selling WoW gold using

PayPal’s gifting system to avoid transaction costs and violating Blizzard’s and PayPal’s EULA).

123. See, e.g., Josh, supra note 122.

124. See id.

125. See id.

126. Making the sale as a gift is evasion only if the U.S. has jurisdiction to tax the gold

farmers. This will be discussed in further detail below. See infra Part IV.B.2.

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b. Players

Like gold farmers, players who engage in buying farmed gold may be

using alternative avenues to engage in RMT transactions.

127

As the

property they are buying and selling is technically not theirs to sell, players

may be engaging in these backdoor transactions to avoid the banning or

suspension of their accounts.

128

Nevertheless, it is also likely that players

engage in high volumes of transactions to evade any form of tax

consequences that may arise from these transactions.

129

On the other hand,

many players may not even realize that these RMT transactions produce

real-world, taxable consequences. As such, any future regulatory action by

the IRS must be highly publicized, perhaps even posted on popular gaming

forums, to reach the masses and inform the ignorant of the ramifications of

their actions.

130

Since 26% of gamers in America are under the age of eighteen,

131

it is

likely that many of these players have little or no taxable income outside of

what they may be generating through RMT. Taxes on income earned from

RMT are likely to be regarded as self-employment taxes.

132

The self-

127. See, e.g., Josh, supra note 122.

128. See Battle.net EULA, supra note 59 (“C. License Limitations. . . . iii. Prohibited

Commercial Uses: Exploit, in their entirety or individual components, the Battle.net Client,

Battle.net or the Game(s) for any purpose not expressly authorized by Blizzard, including,

without limitation (i) playing the Game(s) at commercial establishments (subject to Section

1(B)(vi)(3)); (ii) gathering in-game currency, items, or resources for sale outside of Battle.net or

the Game(s); (iii) performing in-game services, like power-leveling, in exchange for payment

outside of Battle.net or the Game(s); or (iv) communicating or facilitating (by text, live audio

communications, or otherwise) any commercial advertisement, solicitation or offer through or

within Battle.net or the Game(s).”).

129. See Anand, supra note 58, at 289 (“[Internal Revenue Code section 6050W] requires

third-party payment facilitators to report the total amount of revenue received by U.S. account

holders to the IRS when they receive in excess of twenty thousand dollars in two hundred or more

transactions within a calendar year.”).

130. See id. at 255–56 (“Since levels of voluntary compliance with the [I.R.C.] are,

historically speaking, quite high, it follows that providing more information to taxpayers is likely

to lead to increased conformity.”)

131. See Video Games: The New Social Setting, ENTM’T SOFTWARE ASS’N,

http://www.theesa.com/wp-content/uploads/2015/04/Essential-Facts-2015-Infographic.pdf

[http://perma.cc/4KL2-STNR].

132. See I.R.C. § 1402 (2014).

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234 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

employment tax extends to all individuals who earn $400 or more a year

and engage in a “trade or business.”

133

If an underage or low-income

player exceeds this amount, RMT-generated revenue will be subject to a

15.3% tax rate.

134

Unfortunately, without any prior knowledge of taxation,

it is unlikely that these underage players, even if they generate $400 or

more in income, will even file a tax return.

135

III. PREVIOUSLY PROPOSED SOLUTIONS

A. Sales and Use Tax

One suggestion to address the issue of taxation on RMT is to impose

a sales or use tax on RMT transactions.

136

Applying a sales or use tax to

in-game items raises certain issues concerning basis and income

calculation.

137

If a player were to resell an item at a higher price, their basis

would be what they initially purchased the item for.

138

The problem here

lies in the basis of the original seller. It seems unfair to assume the basis in

the item for the original seller is $0, as the player likely spent much time

and effort in cultivating that item.

139

Therefore, it is equally unfair to tax

the reseller only on the difference between their purchase price and their

selling price.

140

133. See id. (supporting the notion that these high volume asset selling players would be

considered to be engaging in a trade or business because they are in the business of regularly

selling in-game assets).

134. See I.R.C. § 1401 (2014).

135. See Teens & Taxes, TEENS GUIDE TO MONEY,

http://www.teensguidetomoney.com/earning/teens--taxes/ [http://perma.cc/395W-KCGB]

(“Nobody likes to pay taxes and most teens don’t think they have to.”).

136. Jeffrey Anand, Note, Virtual Economies Virtually Unregulated: How Clear

Taxpayer Guidance Can Mitigate Tax Compliance Risks, 43 HOFSTRA L. REV. 253, 278 (2014).

137. Id.

138. Id.

139. See id.

140. Given items are not usually resold, this unfairness may not be as prominent.

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A further complication arises when the original seller uses in-game

gold which they purchased through RMT to purchase in-game items.

141

Due to the fact that neither sellers nor buyers report these purchases,

142

there is likely no record, for example, of the exact price Jane spent on

2,000,000 gold two years ago. The exact value of the in-game currency in

dollars must be known to calculate how much real world money was spent

by the original purchaser to calculate their basis in the item, and therein lies

the problem. In any case, even if there was no issue in calculating basis,

many states simply do not apply sales tax to electronically transferred

products.

143

Furthermore, we reach a problem in attempting to tax the service

aspect of RMT. This problem arises when players pay gold farmers to

power-level their accounts for them. If gold farmers are simply playing a

player’s character for them, they are providing a service and not a good.

Even if players were able to keep any currency or items that the gold

farmer acquires during the power-leveling session, that would still be a

byproduct of the main purpose of the power-leveling service. Simply

applying a sales and use tax on RMT will cover neither transactions

involving power-leveling, nor transactions involving the assistance of

lower level players in completing higher level quests by killing bosses or

monsters with higher difficulty levels.

B. In-game Tax Day

Another suggestion is to have an in-game tax day, meaning the IRS

would incentivize players to pay taxes by providing them with in-game

items on a specified day each year.

144

The idea behind this proposal was to

provide players with unique in-game items for complying with tax law by

reporting any earned income generated through RMT.

145

Although this

141. See Anand, supra note 136, at 273.

142. Brian E. Mennecke et al., It’s Just a Game, Or Is It? Real Money, Real Income, and

Real Taxes in Virtual Worlds, 20 COMMC’NS ASS’N INFO. SYSS. 134, 138 (2007) (“Currently,

few players comply by self-reporting taxable game income.”).

143. California State Board of Equalization, Publication 109, Internet Sales (2015).

144. See Anand, supra note 136, at 279. See generally Eric G. Roscoe, Taxing Virtual

Worlds: Can the IRS PWN You?, 12 PITT. J. TECH. L. & POL’Y 1 (2011) (proposing that virtual

worlds create an in-game IRS office and tax day).

145. See Roscoe, supra note 144, at 33.

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236 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

would incentivize tax paying, it seems counterintuitive. If the IRS is

holding rare items as a “carrot” for players to incentivize tax compliance,

once a majority of players comply, there will no longer be any benefit in

receiving the item because it will no longer be unique. Thus, we would

generate yet another cycle of tax evaders expecting a new “carrot” to begin

complying with the law again.

Instead, similar to what South Korea has imposed, it might be

beneficial to impose a fine, or even jail time on anyone engaging in

RMT.

146

The U.S. could also impose a similar penalty for failing to pay the

tax and not for RMT transactions in general. As discussed below, the U.S.

is already fining foreign banks for not providing the information of U.S.

citizens living abroad.

147

Therefore, it may be likely that the U.S. could

implement such a penalty on U.S. taxpayers failing to pay taxes for RMT

transactions.

C. Governmental Virtual Currency Exchange

A third suggestion is the formation of governmental virtual currency

exchanges.

148

A government-regulated exchange would provide players

with a secure place to exchange their virtual currency for real money in a

safe and controlled environment.

149

Here, the government would be able to

tax every currency exchange individually.

150

While this may be an

effective way to tax virtual currency income, many younger players would

be unaware of this system.

151

Even if younger players became aware or

146. Cho Mu-hyun, Korea Prohibits Trade of Online Game Items, KOREA TIMES (June

13, 2012, 5:14 PM), http://www.koreatimes.co.kr/www/news/tech/2012/06/129_112964.html

[http://perma.cc/G2SY-JFQL] (imposing a 50 million won fine for trading commercially or using

a bot).

147. Robert W. Wood, FATCA, IRS Global Tax Law, Is Everywhere—Even Russia &

China, FORBES (July 1, 2014, 3:17 AM),

http://www.forbes.com/sites/robertwood/2014/07/01/fatca-is-finally-here-even-in-russia-china/

[http://perma.cc/857Y-PU52].

148. Anand, supra note 136, at 287–89.

149. Id. at 288.

150. See Robert Schlimgen, Note, Virtual World, Real Taxes: A Sales and Use Tax

Adventure Through Second Life Starring Dwight Schrute, 11 MINN. J.L. SCI. & TECH. 877, 892

(2010).

151. See Teens & Taxes, TEENS GUIDE TO MONEY,

http://www.teensguidetomoney.com/earning/teens--taxes/ [http://perma.cc/395W-KCGB]

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understood how the system would function, they may encounter difficulties

participating in such a system. Most banks require teens between the ages

of thirteen and seventeen to have an adult co-owner to open a checking

account.

152

Parents may be unwilling to allow their children to bind their

checking accounts to a currency exchange service, fearing their children

would abuse the money in the account.

Moreover, this form of currency exchange system will likely only

prove useful to players of games such as Second Life, who are already

accustomed to gameplay with its own currency exchange system.

Companies based in China generate most of the income from RMT

transactions of in-game currency and items for games such as Diablo III or

WoW.

153

Furthermore, players in the U.S. are generally not in the business

of selling currency, but occasionally sell items that they farm themselves or

win during a boss fight.

154

As such, this system will likely have little to no

impact on the current tax evaders, as U.S. players do not necessarily derive

a direct and substantial financial benefit from playing these games.

IV. SOLUTIONS TO THE LACK OF DETERRENCE OF RMT

There are three possible solutions to the lack of deterrence of RMT.

First, the U.S. might attempt to regulate these transactions through

legislation. Second, the U.S. may impose a tax on RMT transactions.

Third, the U.S. may regulate RMT through the games themselves.

(“Nobody likes to pay taxes and most teens don’t think they have to.”).

152. See Chase High School Checking, CHASE, http://www.chase.com/checking/student-

checking [http://perma.cc/BM43-LGDU] (specifying the co-owners must be parents or guardians

with their own personal Chase checking accounts to which they may link the minor’s account);

Citibank Junior Account, CITIBANK, http://www.online.citibank.co.in/products-

services/banking/bank-account/junior-account.htm [http://perma.cc/3AM7-5Y3V] (requiring the

co-owner of the account to be the minor’s guardian with an existing Citibank account). But see

Wells Fargo Teen Checking, WELLS FARGO, http://www.wellsfargo.com/checking/teen/

[http://perma.cc/9QM2-QVVF] (noting the co-owner of the account has to be an adult but not

specifying whether the adult has to be the minor’s parent or guardian).

153. Sarah Jacobsson Purewal, Chinese Prisoners Allegedly Forced to Play ‘World of

Warcraft’, PCWORLD,

http://www.pcworld.com/article/228716/Chinese_Prisoners_Allegedly_Forced_to_Play_World_o

f_Warcraft.html [http://perma.cc/7NXW-XAQ2] (“[A]n estimated 80 percent of all gold farmers

are Chinese.”).

154. See, e.g., WoW Items, PLAYERAUCTIONS, http://www.playerauctions.com/wow-

items/ [https://perma.cc/2PP6-EKZF].

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238 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

A. Government Regulation

In a more drastic move than those proposed here, South Korea’s

Ministry of Culture, Sports and Tourism banned not only RMT of in-game

currency and items, but also any form of hacking, “botting,” or gold

farming.

155

While their objective was to reduce time spent playing these

games and not to address the tax implications of RMT, South Korea seems

to be heading in the right direction.

156

The Ministry intends to enforce its

newly enacted law by imposing a whopping 50 million won ($44,000

USD) fine, and a maximum five-year prison sentence for any violation.

157

B. Taxation

1. China

With at least 100,000 full-time gold farmers,

158

China currently

imposes a 20% tax on RMT as a result of gold farming.

159

Eight of the

largest suppliers have an annual revenue of US $10 million each,

160

generating a sizeable tax revenue. Moreover, the Chinese government

itself is in the business of gold farming, as the government forces labor

camp prisoners to farm gold for the state.

161

This fact raises considerable

155. Cho Mu-hyun, Korea Prohibits Trade of Online Game Items, KOREA TIMES (June

13, 2012, 5:14 PM), http://www.koreatimes.co.kr/www/news/tech/2012/06/129_112964.html

[http://perma.cc/G2SY-JFQL]; Mike Rose, Virtual Item Trading to Be Banned in South Korea,

GAMASUTRA (June 15, 2012),

http://www.gamasutra.com/view/news/172452/Virtual_item_trading_to_be_banned_in_South_K

orea.php [http://perma.cc/2H4M-265Z]; Paul Tassi, South Korea Banning Virtual Item Trading,

Botting and Farming, FORBES (June 12, 2012, 9:52 AM),

http://www.forbes.com/sites/insertcoin/2012/06/15/south-korea-banning-virtual-item-trading-

botting-and-farming/ [http://perma.cc/77SQ-UUVL].

156. See Mu-hyun, supra note 155.

157. Rose, supra note 155; Tassi, supra note 155.

158. Virtual Sales Provide Aid to Poorer Nations, BBC (Apr. 8, 2011),

http://www.bbc.com/news/technology-13012041 [http://perma.cc/YD3L-WLCA].

159. Juliet Ye, Real Taxes for Real Money Made by Online Game Players, WALL ST. J.

(Oct. 31, 2008), http://blogs.wsj.com/chinarealtime/2008/10/31/real-taxes-for-real-money-made-

by-online-game-players/ [http://perma.cc/3NFK-BC2A].

160. Virtual Sales Provide Aid to Poorer Nations, supra note 158.

161. Laura Secorun Palet, Paid Troll, Gold Farmer, Organ Donator: Now Hiring in

China!, OZY (Sept. 4, 2015), http://www.ozy.com/acumen/paid-troll-gold-farmer-organ-donator-

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questions on whether the Chinese government is actively selling in-game

currency and items to U.S. players, and therefore generating U.S.-source

income as a result.

As another example, Australia requires taxpayers to include in their

income any money they receive from gold farming, and requires an

Australian Business Number if a taxpayer earned more than $50,000 from

gold farming in a single year.

162

2. U.S. Taxation

According to the IRS, revenue generated from internet sales is taxable

income.

163

Sellers may be liable “for income tax, self-employment tax,

employment tax, or excise tax.”

164

Any nonresident alien who generates

U.S.-source income above the personal exemption amount must also file a

tax return.

165

Furthermore, foreign corporations that engage in a trade or

business within the U.S. are also subject to taxation.

166

Although the U.S. formed a committee to investigate RMT and

income from gold farming, there are currently no laws regulating the

taxation of RMT.

167

I.R.C. section 63 defines taxable income as gross

income less any deductions.

168

Gross income is “all income from whatever

now-hiring-in-china/40785 [http://perma.cc/87FS-EFJP].

162. Nick Miller, Virtual World: Tax Man Cometh, THE AGE (Oct. 31, 2006),

http://www.theage.com.au/news/biztech/virtual-world-tax-man-

cometh/2006/10/30/1162056925483.html [http://perma.cc/VE53-96E9].

163. Tax Laws and Issues for Online Auction Sellers, IRS (Oct. 29, 2015),

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tax-Laws-and-Issues-for-

Online-Auction-Sellers [http://perma.cc/X3HZ-U6KP].

164. Id.

165. Taxation of Nonresident Aliens, IRS (Nov. 10, 2015),

http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens

[http://perma.cc/4JV9-6SJX].

166. See I.R.C. § 882 (2014).

167. See U.S. GOV’T ACCOUNTABILITY OFF., GAO-13-516, VIRTUAL ECONOMIES AND

CURRENCIES: ADDITIONAL IRS GUIDANCE COULD REDUCE TAX COMPLIANCE RISK (2013),

http://www.gao.gov/assets/660/654620.pdf [http://perma.cc/W5VU-WJJT]; Gold Farming, Real

World Taxation and Regulations, G2G BLOG, (Feb. 25, 2014), http://www.g2g.com/blog/gold-

farming-real-world-taxation-and-regulations/ [http://perma.cc/FT37-ST3D].

168. See I.R.C. § 63 (2014).

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240 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

source derived.”

169

Although income generated through RMT would be

considered gross income under I.R.C. section 61

170

(and thus should be

reported as taxable income),

171

similar to selling items through the Amazon

Marketplace, it is very difficult to monitor.

172

a. Companies Engaged in Trade or Business in the U.S.

Non-U.S. corporations are subject to income tax when the income

generated by the corporation has some sort of a nexus within the U.S.,

173

when a company generates Effectively Connected Income (“ECI”).

174

“All

U.S.-source active income earned by a non-U.S. person is treated as

effectively connected.”

175

To determine whether a company has ECI, we

must first determine whether the foreign company is one that engages in a

trade or business (“ETB”) within the U.S.

176

As the IRS has provided little

guidance on what ETB really means,

177

it is increasingly difficult to

169. See id. § 61.

170. See id.

171. See id. § 63.

172. See Tax Consequences of Virtual World Transactions, IRS (Dec. 2, 2015),

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tax-Consequences-of-

Virtual-World-Transactions [http://perma.cc/5V8Q-LJGX].

173. I.R.C. § 882 (2014); Doing Business in the United States: A Guide to the Key Tax

Issues, PWC 1 (2014), http://www.pwc.com/us/en/tax-services/publications/assets/doing-

business-in-the-us-2014.pdf [http://perma.cc/7YT5-QGMJ].

174. I.R.C. § 882 (2014); see also Effectively Connected Income (ECI), IRS (May 14,

2015), http://www.irs.gov/Individuals/International-Taxpayers/Effectively-Connected-Income-

(ECI) [http://perma.cc/X5G3-DA6U].

175. See Doing Business in the United States, supra note 173, at 5.

176. See Effectively Connected Income (ECI), supra note 174.

177. See Kimberly S. Blanchard, Engaged in a Trade or Business (in the United States),

BLOOMBERG BNA (Feb. 25, 2011), http://www.bna.com/engaged-trade-business-n8589934981/

[http://perma.cc/LL5W-Z3J9] (“There was a time when most people had a pretty good idea of

what ETB meant — it meant you produced widgets, or hung out a shingle as in the case of a

commercial bank. But now that most of the widget-producing has moved offshore and the

traditional banking business has become fractionalized, specialized, and taken private, the IRS

and the tax bar have turned their attention to nontraditional activities, trying to divine what rises

to the level of a trade or business and what does not.”).

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establish whether the actions of these Chinese gold farming companies fall

within the meaning of ETB when they engage in RMT.

Generally, in order for a business to be ETB within the U.S., it must

have a permanent location within the country where it operates and

conducts its business.

178

As it is unclear whether a company that engages

solely in e-commerce and does not have a physical location in the U.S.

would be considered ETB within the U.S., foreign companies may easily

evade taxation. Therefore, the laws need to clearly state that foreign

companies, who direct most of their sales towards and generate most of

their income from the U.S. and engage solely in e-commerce, are subject to

an income tax for income generated within the U.S. If the U.S. were able

to impose a tax on U.S.-source income of the foreign corporation, it would

tax the income at the regular U.S. corporate tax rates,

179

currently the

highest in the world at 39.1%.

180

As mentioned previously in Part II.C, Power Leveling Services

(“PLS”), a Hong Kong company, has offices in the U.S. and Europe where

employees power-level players’ characters.

181

In the case of PLS, because

the company has a permanent location within the U.S., it would be

considered ETB within the U.S. and have ECI, and therefore would be

subject to U.S. corporate income tax. Additionally, if the U.S. has

jurisdiction to tax these Chinese companies because they generate ECI,

companies will not only face U.S. corporate tax rates, but also state and

local corporate taxes.

b. U.S. Tax Treaty with China

The 1987 Tax Treaty (the “Treaty”) that the U.S. signed with China

undoubtedly could not have anticipated the current status of online

transactions.

182

In Article 7 of the Treaty, the U.S. and China agreed that a

178. See I.R.C. § 882 (2014); Effectively Connected Income (ECI), supra 174.

179. See I.R.C. §§ 11, 882 (2014); Doing Business in the United States, supra note 173.

180. See Kyle Pomerleau & Andrew Lundeen, The U.S. Has the Highest Corporate

Income Tax Rate in the OECD, TAX FOUND. (Jan. 27, 2014), http://taxfoundation.org/blog/us-

has-highest-corporate-income-tax-rate-oecd [http://perma.cc/FK92-VDC3].

181. See World of Warcraft US Power Leveling, PLS, http://www.power-leveling-

service.us/wow-world-of-warcraft-gold-us-powerleveling.html [http://perma.cc/VD6N-N79W].

182. See United States-The People’s Republic of China Income Tax Convention, U.S.-

China, art. 7, Jan. 1, 1987, http://www.irs.gov/pub/irs-trty/china.pdf [http://perma.cc/7QS7-

LB72].

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242 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

business would be subject to taxation only if the corporation carries on its

business through a “permanent establishment situated therein.”

183

With the

increasing use of online retailers, it is unlikely that the Treaty’s intention

was to leave out such a substantial portion of foreign income generated

within the U.S.

With most of China’s $140 million in RMT sales directed towards the

U.S.,

184

it seems unlikely that the U.S. would deliberately give up such a

large portion of taxable foreign corporate income. As such, it would be

highly beneficial to both the U.S. and China to reaffirm the Treaty with

terms more akin to e-commerce enterprise. Similar to the revision of the

ECI requirement that a corporation who is engaged in a trade or business

within the U.S. be subject to an income tax, the Treaty must also be revised

to include language that would explicitly include e-commerce as taxable

foreign corporate income. This would prevent companies from exploiting

loopholes in a semi-archaic law. Thus, it is clear that our laws must be

brought into the twenty-first century.

Again, as with the discussion of ECI above, if Chinese companies

have U.S. locations or servers within the U.S., they would satisfy the

permanent establishment requirement of the updated Treaty and would

therefore be subject to U.S. corporate income tax.

185

c. Branch Income

If a non-U.S. corporation has a branch within the U.S., the U.S. can

impose a 30% tax on any profits that branch makes on top of the regular

corporate income tax.

186

Therefore, assuming that (a) a Chinese gold

farming company has ECI to the U.S. and (b) the company would be

183. Id.

184. See Virtual Sales Provide Aid To Poorer Nations, supra note 158 (calculating that

the largest eight Chinese suppliers of game gold have an annual turnover of about US $10 million

each, and sixty other firms each have annual revenues of about US $1 million); see also Danny

Vincent, China Used Prisoners in Lucrative Internet Gaming Work, GUARDIAN (May 25, 2011,

2:49 PM), http://www.theguardian.com/world/2011/may/25/china-prisoners-internet-gaming-

scam [http://perma.cc/Z7ZC-2TZS].

185. See United States-The People’s Republic of China Income Tax Convention, supra

note 182.

186. I.R.C. §§ 882, 884 (2014); Doing Business in the United States, supra note 173, at

5–6.

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subject to a corporate income tax, the U.S. can also impose a branch tax on

any offices the company may hold in the U.S.

187

If the U.S. is able to clarify and update its tax policies and regulations,

there are many opportunities for the U.S. to tax the income of U.S. players,

Chinese gold farming, and power-leveling companies not only at the

federal level, but also at the state and local levels of government.

188

Moreover, the I.R.S., aided by game developers and companies such as

PayPal and eBay, may be able to devise a system that would track “black

market” RMT transactions to curb them in the future.

d. Compliance

Even if the U.S. government is allowed to impose taxes on foreign

companies or on U.S. players, the main problem is compliance. Although

the U.S. and China have a tax treaty, it is unlikely (a) that Chinese

companies will follow U.S. corporate tax laws, and (b) that the Chinese

government would fine or punish Chinese companies for failing to

comply.

189

Instead of devising a tax plan that would prevent tax evasion by

foreign companies generating income in the U.S., the U.S. has been

pushing the Foreign Account Tax Compliance Act (“FATCA”), which

would “requir[e] foreign banks to reveal American accounts holding over

$50,000” or face a 30% tax.

190

While the FATCA is very important, the

U.S. government must push a similar plan for foreign companies

generating e-commerce revenue within the U.S. and who attempt to evade

taxation.

187. I.R.C. §§ 882, 884 (2014); Doing Business in the United States, supra note 173, at

5–6.

188. See Charlie Kearns, New York State on Bitcoins: Transactions Are Barters for Sales

Tax Purposes; Follow Federal Guidance for State Income Taxes, SUTHERLAND (Dec. 17, 2014)

http://www.stateandlocaltax.com/policy-and-legislation/new-york-state-on-bitcoins-transactions-

are-barters-for-sales-tax-purposes-follow-federal-guidance-f/ [http://perma.cc/B7D3-LU5S]

(treating convertible virtual currency as intangible personal property, the transfer of which will be

treated as a barter transaction and will be subject to a state sales or use tax).

189. Because the Chinese government itself engages in gold farming, it is therefore

unlikely that it would be willing to comply. See Vincent, supra note 185 (forcing Chinese

inmates to farm gold during imprisonment).

190. Robert W. Wood, FATCA, IRS Global Tax Law, Is Everywhere—Even in Russia &

China, FORBES (July 1, 2014, 3:17 AM),

http://www.forbes.com/sites/robertwood/2014/07/01/fatca-is-finally-here-even-in-russia-china/

[http://perma.cc/857Y-PU52].

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244 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

C. Industry Self-Regulation

Some online games, such as WoW, require players to pay monthly

subscription fees to have access to the game.

191

As discussed in the above

section on closed-flow currency systems in Part II.B, in 2015, WoW

introduced WoW Tokens in an attempt to combat gold farming.

192

Players

are now able to purchase these tokens directly from the game using real

money, which then allows them to purchase in-game currency.

193

Blizzard,

the WoW game developer, encourages players to use this exchange system,

as opposed to buying through third parties, because it is a safer and more

legitimate way to purchase items and gold.

194

Although these in-game

micro-transactions may potentially lead to the demise of gold farming,

195

third parties will undercut these transactions and continue selling gold and

items. That is, unless WoW or similar games implement prices low enough

so gold farmers no longer derive any profit. While some online games

require a monthly subscription fee,

196

other games such as Diablo III

197

not.

198

These free-to-play games make gameplay more accessible to

191. See World of Warcraft Subscriptions, BATTLE.NET,

http://us.battle.net/shop/en/product/world-of-warcraft-subscription [http://perma.cc/F3FT-CVAG]

(selling WoW subscriptions in 1 month, 3-month, and 6-month increments).

192. See Melissa Loomis, Fixing the Economy: How World of Warcraft is Trying to End

Gold Farming, GAME RANT (Apr. 15, 2015), http://gamerant.com/world-of-warcraft-end-gold-

farming/ [http://perma.cc/494E-LZK5].

193. See id.; see also Blizzard Entertainment, Introducing the WoW Token, BATTLE.NET

(Mar. 2, 2015), http://us.battle.net/wow/en/blog/18141101/introducing-the-wow-token-3-2-2015

[http://perma.cc/3AHH-J6S3].

194. Introducing the WoW Token, supra note 193 (“The WoW Token allows players to

exchange real money for gold in a secure and sanctioned way—together with the ongoing efforts

of our developers, support staff, and anti-hack teams to stop the exploits these companies use and

help players who have become victims of their operations, we hope the Token can help make

World of Warcraft a safer and more enjoyable game for all of our players.”).

195. See id.; see also Loomis, supra note 192.

196. See e.g., World of Warcraft Subscriptions, supra note 191.

197. See Tjwarfle, Comment to Diablo 3...Is it A Subscription Per Month?, BATTLE.NET

(Apr. 30, 2012), http://us.battle.net/d3/en/forum/topic/4768329232 [http://perma.cc/63XW-

DKX5] (rejoicing the fact that Diablo III does not have a subscription plan and is instead

purchased for a one-time fee).

198. See MMORPG Gamelist-All MMO Games, MMORPG,

http://www.mmorpg.com/gamelist.cfm [http://perma.cc/33ZV-MBF4] (providing a list of free

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players who are better able—or more willing—to purchase items and

currency in-game, since they will not be paying for gameplay.

199

As with

subscription-based games, players initially pay to install the game onto

their PCs, along with any expansions the developers release in the future.

200

In 2012, Diablo III introduced a Real Money Auction House

(“RMAH”) where players could bid on other players’ items with real

money, similar to how eBay is run.

201

Nevertheless, due to the $250 price

cap set by the game developers, players still turned to third-party websites

or forums to sell items they believed were worth more than what they were

allowed to sell them for in the RMAH.

202

Then, in 2014, Blizzard closed

the RMAH, stating that it undermined what the developers deemed the

objective of the game: “kill monsters to get cool loot.”

203

Although that

may be the objective of the game according to the developers, players are

always looking for any advantage over other players to have the items

MMORPG games).

199. See Robert C. Weich III, Nintendo Mobile Games: Free to Play, but In-Game

Purchases Included Too, LATIN POST,

http://www.latinpost.com/articles/94027/20151111/nintendo-mobile-games-free-to-play-but-in-

game-purchases-included-too.htm [http://perma.cc/9MSD-JT49] (reporting that while these

games are free to download, they rely heavily on in-game purchases to provide them with

revenue).

200. Compare Diablo III Games, BATTLE.NET,

http://us.battle.net/shop/en/product/game/diablo [http://perma.cc/5E5N-JWHS] (offering the

game for a one-time purchase price), with World of Warcraft Games, BATTLE.NET,

http://us.battle.net/shop/en/product/game/wow [http://perma.cc/KC5L-6XHN] (offering the game

playable only under a subscription plan).

201. See Blizzard Entertainment, Diablo III Auction House Update, BATTLE.NET (May 1,

2012), http://us.battle.net/d3/en/blog/5270376/diablo-iii-auction-house-update-5-1-2012

[http://perma.cc/X57M-A985].

202. See Paul Tassi, Why Diablo 3’s Real Money Auction House Should Not Be Your

Summer Job, FORBES (June 13, 2012, 10:04 AM),

http://www.forbes.com/sites/insertcoin/2012/06/13/why-diablo-3s-real-money-auction-house-

should-not-be-your-summer-job-2/ [http://perma.cc/W9KC-ZZKB] (arguing that

Blizzard/Paypal’s 15% transfer fee further disincentivizes players from using the RMAH).

203. John Hight, Diablo III Auction House Update, BATTLE.NET (Sept. 17, 2013),

http://us.battle.net/d3/en/blog/10974978/ [http://perma.cc/LD2W-W9HC]; Lylirra, Diablo III

Auction House Comes to a Close, BATTLE.NET (Mar. 18, 2014),

http://us.battle.net/d3/en/blog/13354139/diablo-iii-auction-house-comes-to-a-close-3-18-2014

[http://perma.cc/B4CT-49MQ]; Lylirra, Diablo III Auction House Update FAQ, BATTLE.NET

(Mar. 13, 2014, 3:47 PM), http://us.battle.net/d3/en/forum/topic/9972208129

[http://perma.cc/YMB7-VXHR].

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246 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

necessary to fight the best monsters and to collect the best items that drop

once these monsters are defeated. Therefore, without a controlled RMAH,

players will still turn to third parties to purchase better items and more

gold.

One possible non-tax solution to the problem of gold and item

farming is to make items and gold that drop from completing tasks (e.g.,

killing monsters) bound to players, and essentially untradeable. There are

three different types of bound items: Bind on Pickup (“BoP”), Bind on

Equip (“BoE”), and Bind on Account (“BoA”). Items that are BoP are

bound to the character once they are picked up after being dropped from

killing a monster.

204

BoE items, on the other hand, only bind to characters

once they are worn or used by a character, such as a piece of armor or a

weapon.

205

BoA items are the least restrictive because they may be

transferred between different characters on the same account.

206

If players are unable to trade their items, the market for selling gold

and in-game items will come to a screeching halt. Although Diablo III has

attempted to implement a similar solution by binding items to players’

accounts after two hours, players seem to find a way to bypass this new

restriction.

207

For example, Chinese companies now provide U.S. players

with assisted gameplay services.

208

Using a third party website, players can

pay other players to either play their character for them, or to play with

them using a higher level character—much like virtual mercenaries—and

trade the items that drop.

209

Furthermore, players are still able to go

204. Bind on Pickup, WOWWIKI, http://wowwiki.wikia.com/wiki/Bind_on_Pickup

[http://perma.cc/M67T-JTJR].

205. Bind on Equip, WOWWIKI, http://wowwiki.wikia.com/wiki/Bind_on_Equip

[http://perma.cc/QE3A-K5B6].

206. Bind to Account, WOWWIKI, http://wowwiki.wikia.com/wiki/Bind_to_Account

[http://perma.cc/8Z95-3HYJ].

207. Playing with Friends: Trading, BATTLE.NET,

http://us.battle.net/d3/en/game/guide/gameplay/playing-with-friends#trading

[http://perma.cc/HP7G-MF8T].

208. See, e.g., AdamR1028, (S4) Demon 50+ Legendary Set Unidentified Items, T8 Rifts,

GRifts, US/SEASON 4, PLAYERAUCTIONS (Oct. 21, 2015, 10:37 AM),

http://www.playerauctions.com/offer/s4-demon-50-legendary-set-unidentified-items-t8-rifts-

grifts-us-season-4-113197065/ [http://perma.cc/ZA6F-FYW5] (offering services to handplay a

character without the use of bots or automatic programs).

209. See id.

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directly to gold farming websites and purchase gold farming services.

210

Similar to services offered by individual players, these farming websites

charge fees to farm gold while playing your character.

211

In this scenario,

players and farmers are now selling their services, similar to power-

leveling, and not in-game items or gold. Although players may still exploit

the system, many are upset that Blizzard is restricting their ability to trade

unwanted or unnecessary items with friends who would have otherwise

benefited from these items.

212

As a completely BoA system would greatly

restrict cooperative gameplay, developers would likely lose many players.

Thus, a completely BoA system would likely be more financially

detrimental to the developers than allowing players to trade and engage in

third party RMT.

Furthermore, similar to power-leveling services, assisted gameplay

raises complex issues of taxation on services. Leveling another player’s

character or aiding the player in completing a quest or a boss fight is a

service and not a good that can be subjected to a sales tax. Therefore, even

if a sales and use tax were to be implemented on the sale of virtual currency

and in-game items, these services would be left out of such a tax. As such,

each state would have to individually decide whether this type of service

would fall into their individual lists of taxable services. If decided in the

affirmative, states would need to then decide how they would tax such

transactions. This potentially poses a different issue altogether as the

services are being provided by foreign companies.

A final solution may be for game developers, who allow players to

trade items, to trace the movement of items known to have high real world

value. Although this may be difficult to implement, it may be helpful not

only to game developers to more easily implement their EULA and protect

their intellectual property, but also to the IRS if the game developers could

report suspicious activity, such as high volume transfers from specific

characters they can flag as gold farmers.

210. See e.g., DIABLOIIIGOLD.COM, http://www.diabloiiigold.com/

[http://perma.cc/4L4E-LNH9].

211. Id.

212. See EPICTBROWN, Bind on Account, BATTLE.NET (May 25, 2014),

http://us.battle.net/d3/en/forum/topic/12946644852#1 [http://perma.cc/PYM8-D9MS]

(complaining about BoA); AlbertE, Bind on Account Needs to Go, BATTLE.NET (Mar. 2, 2014),

http://us.battle.net/d3/en/forum/topic/11914281694 [http://perma.cc/P3LM-GF96].

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248 LOYOLA OF LOS ANGELES ENTERTAINMENT LAW REVIEW [Vol. 36:3

V. CONCLUSION

There is a moral and ethical problem with the way online games are

evolving. The world is not fair and just, but games are supposed to be.

Unfortunately, for-hire virtual mercenaries and gold farmers are making the

gaming environment like the Wild West, where those with money win. As

demonstrated in this Note, both players and gold farmers always seem to

find ways to manipulate gameplay, and the system, to profit from other

players who are willing to spend money to better their characters and

accounts with little effort.

Although difficult, and possibly intrusive, the U.S. may attempt to

regulate the ever-growing “black market” of RMT. Another possible

solution is to engage in drafting U.S. and U.S.-International tax legislation

that would encompass these transactions. Unfortunately, because the U.S.

does not have jurisdiction over most Chinese companies, taxation of RMT

will not deter gold farming companies from engaging in RMT, as they

would not be subject to any U.S. or U.S.-International tax legislation.

Furthermore, even those players who are taxable under U.S. jurisdiction

may still evade relevant tax laws. Thus, the IRS will likely benefit from a

partnership with high volume game developers, such as Blizzard, to

develop a system of accountability where gold and items transferred

between characters are closely monitored and reported, especially

transactions between international and U.S. players.