Many photographers run their own businesses and as small business owners, it is important to be knowledgeable and current on rules and regulations, especially when it comes to taxes. Sales tax can be a tricky subject as it varies from state to state, as well as from product to product. In today’s digital age, the rules of sales taxes become even more important as we differentiate more and more between tangible and intangible goods, such as physical photos and digital downloads. We delve into the details behind the basics of sales tax and when it is applied.
Sales Tax 101
Sales taxes are taxes imposed by the state and local governments (and oftentimes counties) on sales of certain goods and services. Usually the laws require the seller to collect the tax from the consumer when the purchase occurs within the state and to submit the taxes to the local authority. The rates and laws of sales tax differ significantly between states and sometimes even counties and thus have to be carefully checked according to the local laws. The rate of sales tax range from zero in states like Oregon and New Hampshire to 7.5% in states like California. The actual final tax differs by county due to additional local sales tax which can bring the total sales tax rate up to 10% in parts of California and 11% in parts of Alabama.
In general, sales tax is imposed on the sale of tangible assets like toys and clothing. In some states, however, some tangible items are exempt from sales tax, such as certain food products and prescription medications. Items bought from an out-of-state retailer are subject to use tax in many states, which acts as the equivalent to the sales tax from a local merchant.
Even though historically sales taxes were imposed only on physical goods, over time many states have added rules to tax services as well. This occurred in two main ways:
- Imposing sales tax on some or all types of services.
- Limiting the service tax exemption to exclude services which can be perceived as an inherent part of the final product which is taxable.
In general, manufacturing of a product cannot be considered as “a service” exempt from tax, even if this activity is done for a specific customer. For example, Texas law states:
“Persons who are engaged in the business of fabricating, manufacturing, processing, or custom manufacturing must collect sales tax on the total sales price of the manufactured item …The sales price includes the cost of materials, labor or service costs, and all expenses that are connected with production” Source:Texas Administrative Code
The idea behind this is that the labor is so closely connected and integrated with the product that trying to separate the labor from the final product and title it as a “service” is artificial, which comes only to serve a tax avoidance purpose, and thus is forbidden.
Sales Tax and Photography
Let’s go back to the days of film photography. A family steps into a studio of a portrait photographer and has a series of photos done, and after an hour or two they give $2 to the photographer and walk home with a package of portraits. Of course what they bought was the photos; taking the photos was just an inevitable part of the custom manufacturing process of the product. This is also known as “fabrication services.
Sales Tax and Digital Photography
When digital photography came around, things started to become a little more complicated. All the work going into creating a physical product (for example a gallery wrap) will be considered taxable, including taking the photo which will be considered fabrication services. Therefore claiming that taking the photos was “a service” which shouldn’t be taxed will be rejected.
But what if there are no physical goods, but just images on a DVD or flash drive as so many wedding photographers do these days? Here things become a little tricky conceptually but not in the eyes of the sales tax man. According to most sales tax authorities this transaction is clearly still within the realms of selling a physical good. The small 1 inch flash drive is the tangible asset that triggers the sales tax liability. Furthermore an attempt to split the fee between the photography “service” (let’s say $1500) and the tangible good ($500 for the drive) will probably be rejected as well, due to the photography being an inevitable part of the custom manufacturing process and fabrication services of the physical good (the drive in this case).
Now with the development of the “cloud,” there are simplesolutions to deliver digital files without a need for a tangible good. Does this change anything? Does such a transaction still require sales tax?
Sales Tax and Laws Differ By States
Like all sales tax matters it depends very much on each state. California for example is very clear on this matter:
“Tax applies to your sale of tangible, physical products, including photographs. However, if you transfer a photograph electronically and do not include any physical product in your sale, tax does not apply. This is true whether you transfer a photograph by the “load and leave” method described below or remotely (for example, by email or file transfer protocol [FTP]). Please note that sales tax will apply if you provide your client with a copy of the electronically transferred photograph in any sort of tangible form such as a copy of the photograph on a CD or other storage medium or a physical print, copy, or negative of the photograph.“ Source: Photographers, Photo Finishers, and Film Processing Laboratories
However just transmitting electronically is not enough, the state continues:
“You should document any electronic transfer of a photograph so that you can show why tax does not apply to that transaction. For instance, if you electronically transmit a photograph to a customer by email, you should print out a copy of the transmittal email and retain that copy in your records. If you transfer a photograph by FTP or download it to your customer’s computer directly from your computer, a CD, or another storage medium that you keep (the “load and leave” method), you should document the transfer in your records. “(albeit, Pg. 5)
Other states have different views on “digital downloads.” For example, Connecticut taxes digital downloads at a preferential rate, but they are not completely tax free:
Q: Are sales or purchases of “digital downloads” from the Internet subject to Connecticut sales or use tax? Some examples of “digital downloads” include software, books, magazine or newspaper articles, artwork, ringtones, games, music, videos, concerts, and sporting events.
A: Yes. Sales or purchases of “digital downloads” from the Internet are subject to Connecticut sales or use tax. As long as no tangible personal property is provided in the transaction, sales or purchases of “digital downloads” are treated as sales or purchases of computer and data processing services, and taxable at a 1% rate. However, if tangible personal property is provided in the transaction, the sale or purchase of “digital downloads” is treated as the sale or purchase of tangible personal property, and taxable at the 6.35% rate. Source: State of Connecticut Department of Revenue Services
When it comes to photography services, there is a full guide for Connecticut photographers.