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Paid Mods & Donations and why they don't work

kat · 1 · 25753

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Offline kat

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Warning: long post ahead...

Summary: There are a number of reasons Modders don't use Donate buttons. It's not that they don't want to. They're hesitant because complications arising from the nature of content monetisation, especially when that's often at the expense of Third-Party Intellectual Property, which makes trying to find an equitable solution that satisfies the many parties involved no easy task. Instead they'd rather just avoid the issue altogether...
The following discussion should not be construed as Legal, Business or Tax advice. Where applicable consult an appropriately qualified Professional Adviser in these matters.
"Gamers and Mod Authors should exercise caution using donations in conjunction with 'Paid Mods' and other paid content, or avoid using it altogether"
During Valve's recent failed Paid Mod's program Gamers kept asking why Mod Creators didn't (and still don't) have "Donate Now" buttons on their websites or project pages as an alternative means to solicit financial support. It's a valid question. Unfortunately it doesn't have a simple answer because at its heart donations are a form of content monetisation, that compensating Modders for their work, even through donations, is an effort to commercially exploit someone else's Intellectual Property, something that's not normally done without permission or license.

Even then the matter is further complicated by the fact that donations are a specific form of income only a few entities can rightfully accept; they are not just a means of transfer between parties absent transaction fees, and their receipt is not a weaselly way to avoid income liabilities such as tax because... "donation".

Payment processing and Donations
Payment Processors like PayPal typically impose rules that 'donations' can only be accepted if the recipient is a registered or recognized Charity, Non-Profit or other Tax-Exempt organisation (cf. Additional Resources below). Individuals are not exempt from these conditions and, if not working for, on behalf of, or being one of the aforementioned themselves, would be required to provide proof funds were being raised for, or on behalf of, a specific non-profit cause, drive or event. The key concern in this is "non-profit"; donations cannot be accepted or used for 'financial gain' of any kind, doing so is seen as a significant Terms of Service violation that can result in summary account suspension and the confiscation or refund of monies held.

Tax and Donations
More important than Payment Processor restrictions are Tax Authorities regulations. To them receipts qualify as donations only when certain criteria are met, which are in fact the basis upon which Payment Processors determine their own policies and procedures; that a transaction is not considered a donation unless it's received by a registered Charity, Non-Profit or other Tax-Exempt Organisation, or an individual that's duly authorized to accept funds in a non-profit capacity (notwithstanding there being income thresholds requiring individuals register as a legal 'charity' Entity). This means individuals may be, intentionally or not, committing fraud at best, tax-evasion at worst, should they accept donations when not properly authorised or duly recognised to do so.

Generally speaking then, it's bad news because the above points mean both Gamers and Mod Authors should exercise caution using donations in conjunction with 'Paid Mods' and other paid content, or avoid using it altogether.

--- Part II ---

Mod Authors in particular should then also be aware of the following additional, and not so insignificant, concerns that may prevent the use of donate buttons on their project pages and websites...

Terms of Service & Solicitation
It's likely that 'donate' buttons violate Terms of Service agreements websites or services often have in place expressly forbidding individuals monetise traffic independently of any sales mechanism a site may or may not provide. Violation typically results in profile pages or websites being pulled and users banned, a common practice for free hosting services, social media sites or other service the End User has not specifically paid for (even paid hosting for personal use may have restriction that prohibit the solicitation of money from visitors).

Modding & Licensing
If the Modder decides to set up their own Store there are licensing issues to contend when selling content because game modification is a privilege granted the End User by the IP Holder, usually conditionally defined in an EULA or other User Agreement, which also often expressly prohibit the monetisation of content based on, or using their IP. Without the appropriate permission Modders can be shut-down through the issuance by the IP Holder of Cease and Desist Notices or other legal action (equally applicable consequences to "Fan Art" and "Fair Use").

Modding and Copyright (DMCA)
Related to "Modding & Licensing" is Copyright Infringement. Although a complex topic in its own right, the crux of the matter for Modders is that they alone are solely responsible for policing their work to make sure it complies with any licensing requirements or restrictions, and that their own work is not being misappropriated by others; Service Providers or other Third-Parties are under no obligation to do this for, or on behalf of, the Author (even when agreed). And whilst the End User may notify Mod Authors of possible infringements, only the Mod Author can take action. This requires Modders be familiar with DMCA principles, procedures and consequences.

Modding & Income Status
In general because donations are a specific type of tax-exempt receipt from/for non-profit activities, income not classed as such is considered to be revenue generated from normal for-profit (business) activities and will need to be declared appropriately by the individual to their local Tax Authority, typically though Sole-Tradership, Self-Employment or other form of self-assessment or declaration. Income earned and declared in this way might also be in addition to gainful employment and income received from other sources (a 9-5 job for example).

The Business of Modder
Hand in glove with "Modding & Income Status", receipt of income whilst engaged in for-profit activities essentially means the Individual is in business for themselves as a Sole-Trader or Self-Employed Entity, although not necessarily as a registered Company or Corporation. This isn't a semantic argument, it's how other businesses will relate to the Individual, as their being a business not an person, irrespective of their self-identifying as an "amateur" or "hobbyist" Modder or Creator. This change in 'status' brings to the table a whole host of business, tax and legal obligations and concerns Modders would then need to be aware of (some of which are discussed in the above).

All in all then finding an equitable solution to Paid Mod's isn't easy, it turns out it's not quite as simple as putting a donate button and a website because doing so opens up a litany of issues that convolute what should otherwise be a sincere act of transferring money from 'fan' or 'customer' to 'creator'. As with anything that involves money though, providing a means through which Creators can generate income if they so choose to is never that easy.

Addional Resources

- How does PayPal approve charities and nonprofit organizations? (US)
- How can my charity or nonprofit use PayPal to collect donations? (US)
- What can I do with PayPal? (US)
- Create a Donate Button (US)
- How do I accept donations for my charity through PayPal? (UK)
- Fundraise online with our affordable solutions (UK)
- How do I get the discount rate for charities registered with the CRA? (CA)

- Charitable Contribution Deductions
- Topic 506 - Charitable Contributions
- Eight Tips for Deducting Charitable Contributions

- Charities and tax
- Tax reliefs for charities
- Get recognition from HMRC for your charity
- Charity donations: tax relief