State Sales Tax: To Charge or Not to Charge?
Tuesday, July 6, 2010 at 8:31AM First and foremost, when dealing with the subject of state sales tax, we must acknowledge that the principles of this topic vary from state to state. Now that we've put that out in the open, let's get to the heart of the matter: does a real estate photographer charge sales tax to her/his clients?
Let's begin with the tax itself: it's a tax administered to the end-user for purchasing a good, collected by the party making the sale. The business doesn't make money on the deal, in fact, state sales tax can deter people from purchasing large-priced items.
The Sale of a Good vs Providing a Service:
The whole reason we're even talking about whether or not to charge sales tax is because there's a significant amount of grey area involving what we as photographers provide: do we provide a good or a service? See, goods are subject to state sales tax. Goods are tangible, touchable, purchasable things. You walk into the store, buy a good, and you walk out with it. Services are labor, time, and above all, intangible. This is the crux of the matter - in the digital age, we don't have to create tangible goods to make a living.
Let's go back a few years, to a time when our medium for capturing light was film. In those days, there was no point in taking pictures unless you had the intention of selling them. Quite frankly, you'd be wasting your time. The state tax laws covered everything from head to toe, the prints to the negatives - if you were a photographer, you were definitely collecting sales tax. Fast forward to today - a photographer can be create digital images, deliver them online, never produce a tangible product, and be paid for the service/time/labor. Think about it, when the medium changed, the entire business model was flipped on it's ear - even if your efforts never come to tangible fruition through your own efforts, your service is still valued.
Ok, So What if I do Produce a Tangible Product?
So like I said, each state defines who does and doesn't have to pay sales tax a little differently - so be sure to do your research. In this case, I'm going to use the most common guidelines.
If you make a DVD of the images, prints, photo albums, etc. - you're producing a good. Goods are subject to sales tax, as we've covered, but that's not all - in the field of photography, the good is recorded as a sale, and now the service/labor that went into creating the image is subject to sales tax as well as the good could not exist without the service/labor. I don't make the rules, so don't yell at me. So to be clear: no product, no sales tax. Product, sales tax on the good as well as the service (should be recorded separately as well).
Is This Just Dome Kind of Loophole or Something?
No, I personally don't think it's a loophole, I think some states view digital goods not to be taxable, while others are ‘catching up with the times’ and realizing it’s lost revenue. Try and think about it in another way - when you download software, do you pay sales tax? Most would answer no. Thats because you didn't physically acquire a product, you just transferred 1's and 0's from one place to another. If you purchased that same piece of software in the store, you would have to pay sales tax. The same is true for digital photographers who only deliver their files electronically - no product, no tax. The moment you make a product, you are now required to charge sales tax.
Define the Service in Writing:
The best way to steer clear of any confusion down the pike is to put the terms of service in writing. In your invoices, think about including a one or two-sentence statement outlining how the digital images will be delivered to the client. If you state it in writing and follow-through with it in practice, there should be no doubt of whether or not a tangible product was transferred.
Talk to the Professionals - Interpretation is Key:
This topic came about because a reader/viewer who also lived in my state, Virginia, was informed (incorrectly) by the state tax office that she should be charging sales tax on digital photography. What I did was get on the (electronic) horn and chatted with a number of tax agents, each of which gave me conflicting interpretations of the tax law. I got on the real phone the next morning and got the ‘official’ scoop (everything I just said in this article, essentially) and realized that not even the professionals have this area down to a science. After that, I talked to an accountant and they confirmed what the agent on the phone said. I would highly advise talking through the tax law with a human being and confirming that information with an accountant, it'll not only give you a better understanding of the law, but peace of mind that you are operating your business correctly.
Stay Current:
Know your state’s tax rules and stay current - if the rules change, you probably aren't going to get an email, you're going to be responsible for knowing the rule changed. Knowing and following the tax laws in your state will help your business run smoothly.
Reader Comments (5)
:) After our conversation via email I also spoke with a tax accountant personally who confirmed all that you wrote in this article (at least as it applies to his current experience and current Virginia state tax law). And the advice to note the method of delivery on the invoice is a good one - just added that to my invoices this week. He indicated that if any goods change hands at all (DVDs, Sales Brochures that are printed, prints, CDs, etc.) that the labor is taxable as well - as you indicated. Good advice to talk to a tax accountant in your own state of business. Thanks for all your help in answering this question!
I find this topic infuriating in my state. I own a photography and a computer business. When I build a new server, I charge sales tax on the hardware, but I am not required to charge sales tax on 50hrs of labor building it, installing it, and setting up the client's network, etc. However, without the labor, there would be no server, and so that thought process is critically flawed. I know of no other industry as targeted as photography in this regard. If I have a mechanic replace my brakes, he charges me sales tax on the parts, but not his labor, and yet the part is useless (to me anyway, haha!) without the labor. Photography services should be the same way. But, the idiots at Maine Revenue Services (who have probably never edited a photo in their life and don't understand the industry) interpret their law a different way. http://www.maine.gov/revenue/salesuse/Bull308.pdf Here are two sentences from that bulletin. "Taxable Sales: i. Sales of photographs, portraits and videotapes, including the sale of a digital product delivered electronically... Tax must be charged based on the entire sale price of the property sold to a customer for use or consumption, including any services that are a part of the sale." Of course, they don't point to where this is in the tax code itself, and I've yet to find it so specifically written, but this is what the courts will agree with. Sigh...
Thanks for writing the article though! This topic gets very little discussion.
Thanks Catina and Aaron. This is exactly what I mean by the variation in tax laws by state - it can really trip people up who are usually trying to do the right thing in the first place, but don't understand the law as it's difficult to both decipher and interpret. It sounds like Maine is ahead of the curve and has realized the potential loss of revenue due to electronic delivery of images. Thanks for the info!
Mike
We called the state tax office three different times and talked to three different people to make sure we had the rules right in our state and all three times they said we always had to charge sales tax regardless of whether we delivered a CD/DVD or clients downloaded the images. They were all very confident in their answers. But I had my doubts and wanted to be sure, so we were able to get a hold of an attorney for the state tax office rather than whoever they have normally answering the phones and they said we do not have to charge sales tax if the images are delivered via the internet. I believe the attorney. This was in Tennessee.
Right on - Great example Brad. It's beyond my comprehension how much grey-area there is, so much that the professionals interpreting the tax code answer it incorrectly on a consistent basis.
Mike