Running a photography business means you sometimes have to deal with taxes. Managing your tax obligations probably isn’t your favorite part of being a business owner, but sucking it up is a must in order to protect your business.
As Christopher Bullock originally said and good ol’ Ben Franklin famously quoted, “in this world nothing can be said to be certain, except death and taxes.” Nearly 300 years later, these words are still true. State and local governments have been hit hard by the recession and the popularity of “tax-free” online shopping. They are aching for revenue, and if you don’t pay the taxman, he will find you.
Are you scared yet? Good, you should be! This is your business we are talking about and the last thing you want to unexpectedly hear is that you owe thousands of dollars in back tax liabilities, interest and fines.
Complying with sales and use tax obligations can be a complex and confusing endeavor for business owners. While the information that follows is valuable and informative, after reading this you likely will have additional questions that are specific to your business and your local area. Hire a tax professional who can help you sort out the tax regulations for where you are doing business. In this post we will cover:
Don’t miss the Sales Tax Guides at the end to jump start your knowledge.
Sales and Use Tax
Let’s walk through some basics about sales and use tax. First thing first — there are many types of taxes at the local, state and federal level that apply to businesses. The two major ones are sales tax and income tax. Photographers often trip up on the fact that these are separate and entirely distinct taxes.
Sales taxes are imposed on the sale of tangible personal property and specified services, and are administered at the local and state levels. More often you hear people mention sales tax, but we cannot forget about use tax. Use tax, simply explained, applies when a sales tax has not been paid on a taxable product or service. There will be more about use tax later in this article.
Separately, income taxes are paid on the income you earn as a photographer and are administered at the state and federal levels. The laws governing sales tax and income tax are very different.
Try to keep sales tax and income tax separate in your mind because the information that follows applies only to sales and use tax.
A Brief Lesson in Sales Tax History
Sales tax has been around for a while! Believe it or not, sales tax can be traced back to Egypt, Athens and Rome. Mississippi is credited with having the first general sales tax as we know it today in the United States. Mississippi instituted its tax in 1930.
Today, sales tax is imposed in 45 states. You read that correctly… Not every state has a sales tax.
The states that don’t are sometimes called the “NOMAD” states: New Hampshire, Oregon, Montana, Alaska (although local boroughs there do have sales taxes), and Delaware.
In addition to the states, there are more than 8,000 cities, towns, school districts, counties and other special tax districts that levy sales taxes.
Remember that sales and use tax laws vary from state to state. Laws also can vary at the local level.
Why Do I Have to Collect Sales Tax?
Sales tax is a part of doing business. It’s as easy as that. The business owner bears the burden of collecting the tax from the consumer, who in turn bears the economic responsibility of paying the tax. If you sell products or provide services that are either taxable on their own or taxable when included as a part of a product, you will need to collect sales tax from your clients on such taxable sales transactions.
After the business owner collects the sales tax from his or her client for these taxable transactions, the sales tax is remitted to the state or local tax agency via the monthly, quarterly or yearly tax return. How frequently these returns must be filed varies from state to state and is determined by the business’s average sales amounts.
Sales Tax Requirements
As noted, sales tax laws vary from state to state and sometimes even at the local level. This means that the requirements for compliance may differ greatly depending on where you do business. In general, you will need to get a seller’s permit or a seller’s license for the jurisdiction in which you are collecting sales tax.
Your first step should be to find out the name of your state’s sales tax agency. The most common name for this agency is “Department of Revenue,” which often is shortened to “DOR.” An example is the Massachusetts Department of Revenue. But this name can differ by state, so find the proper agency online by doing a web search for your state’s name, plus “sales tax.”
Your state tax agency likely will have a Frequently Asked Questions page for businesses that explains general sales and use tax obligations. When I did a web search for “Texas” and “sales tax,” I found a web page with need-to-know sales and use tax information for Texas. A search for “California” and “sales tax” leads to a web page about sales and use tax in California.
States want to make it easy for businesses to collect sales tax.
In most states, you can do several important tasks related to this online, such as registering your business, obtaining a permit or license, and filing your sales and use tax returns. If your state also requires that you register with your local county or city, you should be able to find that information online too.
Depending on where you are doing business, it’s important to remember you might also need a local permit to collect sales and use tax. Glendale, Arizona, is one example of a city that requires a local tax license.
If you are unsure of what steps you should take, state and local tax agencies usually have a call-in number for questions. Some states, such as Colorado, even host monthly informational sessions on sales and use tax. These forums typically are conducted in-person or via webinars and are tailored for new businesses. Ultimately, states want to help businesses understand their tax obligations so that business owners can comply with sales and use tax laws. Proper business compliance means fewer headaches for state auditors and more revenue overall for states and localities.
After you are registered to collect sales and use taxes, you will be required to file a return. As stated earlier, you will be assigned a filing frequency, which depends on your average monthly sales. For most photography business owners, this will be quarterly or monthly.
It’s the million-dollar question that comes up over and over again in groups and forums. Every photography business owner wants to know what exactly is taxable and what is not.
This is a more straightforward answer if you’re a toy salesman: the toys are taxable, assuming there isn’t a special sales tax holiday or exemption. But the answer is more complicated for photographers, who provide both services and tangible products. Is only the tangible item — such as gallery wrap — taxable OR are the services — such as the sitting fees — taxable as well? What about digital images? Are they taxable too?
Like I said, the laws are not the same from one state to the next. And to make things even more complicated, the laws are complex and not easily understood. In some states, the taxability of portrait photography is different than the taxability of event photography. And get this — the laws can change!
Business owners can complain all they want, but the truth is that compliance on sales and use tax is imperative. If a business owner fails to collect sales tax from his or her customers, state agencies won’t be forgiving. Being unaware of tax obligations isn’t an acceptable excuse for not complying with the law. If you fail to collect the proper sales tax from your clients and are audited, the result can be ugly.
An auditor will come and look at ALL of your business records to double check you were charging tax as you should have been. If the auditor finds that you didn’t collect the proper sales tax, you will be billed directly for unpaid tax liabilities, with penalties and interest. Sure, you can try and recoup some of the money from clients, but good luck with that! Your clients are under no obligation to pay up.
The moral of that story is that you should do absolutely everything in your power as a photography business owner to make sure you are collecting the proper sales tax from your clients (as well as submitting any use tax you may owe). You need to know what is taxable. Disregarding the specific details of your business and your transactions — along with what state you are doing business in — here are some general tips that should help you out.
Sales Tax on Services
Many photographers mistakenly believe services aren’t subject to sales tax.
Actually, not only are specific services taxable in many states, but services may also be taxable when they are very closely connected to the production of a tangible item.
Let’s discuss the following scenarios:
Photographer charges the client $2,500 for wedding photography services, which include a flash drive of images provided to the client. Photographer does not charge sales tax.
Photographer charges the client $2,000 for wedding photography services, which they do not charge sales tax on. Photographer also provides a flash drive of images to the client for an additional $500 fee to which sales tax is applied.
In Scenario 1, the photographer charges no sales tax. The photographer might believe that photography is a service and that the flash drive of images is an inconsequential element of those services. Unfortunately, this is an incorrect assumption according to most states’ tax requirements.
In Scenario 2, the photographer only charges sales tax on the flash drive of images. The photographer might believe that the flash drive is subject to sales tax because it’s a tangible item, but the services provided aren’t. Unfortunately, this also is incorrect in most states.
You are probably thinking, “Why is that?” Let me explain.
Many states consider photography services a part of the “fabrication process.” In other words, the labor (photography service) is so closely connected to the final product — the flash drive of images — that the labor necessary to make those images also is taxable. Why does someone hire a photographer in the first place? They are paying for the service of photography in order to get the final product — the images. Simply put, your client wants photos. They want an album, a gallery wrap or a drive of images. Without the photography service, these items wouldn’t exist because there would be no photos.
Without diving into any one state’s laws, this brief explanation gives you the gist of why photography services and tangible products may be subject to sales tax. Again, this is only a general explanation. In this post I cannot possibly speak to every state and local sales and use law. But armed with this information, you can contact your state and local tax agencies to get the information you need to ensure you are collecting sales tax properly. Also, remember that the treatment of sales tax for portrait sessions may be different than for event photography.
Sales Tax on Digital Products
In the old days, clients would expect to get something tangible from their photographer. However, technology has changed the landscape. In the past year alone, digital storage services like PASS and Dropbox became more widely used by photographers to deliver images to clients. Another huge misconception is that digital images are not subject to sales tax. This is not true.
Depending on state law, digital images that are electronically delivered to and downloaded by your client from the Internet may be subject to sales tax.
Alabama, Maine, South Dakota, Texas, Utah, Washington and a few other states require that sales tax be charged for digital images. Additionally, if you find your state does not apply sales tax to digital images today, be aware that more and more states are passing legislation to tax these types of digital products. This means that your state law may change in the future. Sales tax laws can and do change.
A use tax applies to taxable goods and services for use in your state, where you haven’t been charged a sales tax. Use tax is reported and paid to your tax agency along with your sales tax, via your tax return.
The simplest example of use tax is when a photographer located outside of New York — let’s say in Massachusetts — purchases a camera strap from Adorama, which is located in New York City. The camera strap is shipped to the Massachusetts photographer and Adorama collects no sales tax. This is because Adorama isn’t obligated to collect sales tax from Massachusetts residents. Because the photographer hasn’t paid sales tax on this purchase, they must now self-assess the sales tax due, since they plan to use this item in Massachusetts, and remit the amount of sales tax due to the Massachusetts Department of Revenue on their sales and use tax return.
Consider yourself very lucky if you are a photographer who does business in a state that only has one tax rate. With only one rate, calculating the rate of sales tax applied to a transaction becomes much easier. For example, the sales tax rate in Massachusetts is 6.25% statewide. That means that at any location, the tax rate is 6.25%. In some states, however, the tax rate varies from one location to the next. This is because some states have cities and counties with rates that differ.
To make things even more difficult, in some states sales tax is calculated at the “ship-to,” while in other states it is calculated at the “ship-from.” Say what? This means that if you ship items to clients, if you are located in a state that calculates sales tax at the ship-to location — your client’s address — you will have to know the sales tax rate that is applicable for that address.
Many state tax websites have tax rate locators or charts, and they are the most reliable sources for tax rates. However, there are other websites such as TaxRates.com and GeoTAX.com that provide location-based sales and use tax rates.
There are several types of tax exemptions. One is a goods or service-based exemption, such as an exemption in some states for the purchase of prescription medicine. This exemption exists due to the nature of the product. Another type of exemption is entity-based, which may be an entity like a church. And the third type is an exemption for resale.
Entity-based exemptions are the most common type for photographers. Some entities, due to their status, are excused from paying sales tax on certain qualifying transactions. A church or a nonprofit organization that expects to be exempt from sales tax may hire you. Subsequently they should let you know that they are exempt from sales tax.
Be sure to research your state law. Some states require that the exempt entity be a certified §501(c) organization, and that the organization must have filled out an application with the state tax agency. Additionally, not all transactions will qualify for the exemption. Just because someone tells you they don’t have to pay sales tax doesn’t mean they are correct.
Doing Business in Other States
If you are traveling to other states to photograph clients, you may actually be doing business in more than one state for sales tax purposes. This is a common occurrence where states are located in close proximity to one another, particularly in the Northeast. Photographers in these areas often must collect and remit sales tax to more than one state — the state in which their business is physically located as well as other states.
This is a more complex area of sales tax, but know that if you are traveling to other states to photograph for clients, you may be obligated to collect sales tax in those states. The individual state law, along with the specifics of your transactions, location of your clients and how you deliver products to your clients, should all be reviewed in order to determine these tax obligations.
Hiring a Professional
I hope this information on sales tax is very helpful for you and your business. I know that sales tax can be an overwhelming subject, but it comes with the business … and I am confident you will sort it out!
If you already have contacted your state and local tax agencies but have found them unhelpful, you might want to consider hiring a tax professional. As I noted, sales tax can be complex, and you might need more personal assistance than your tax agency is willing to give you. If you do hire a professional, make sure they have a broad understanding of sales tax laws, as well as the issues specific to a photography business. Not all accountants or attorneys are sales tax experts, nor do all of them understand the transactions that are unique to photographers.
Sales Tax Guides
Hiring a tax professional can be out of reach for many new photography business owners, but that doesn’t mean you have to risk the health of your business. Consider referring to a Sales Tax Guide for Photographers (affiliate).
These guides tell you what is taxable and what isn’t taxable from a product and services standpoint. They also provide easy, step-by-step information on how to register for a seller’s permit in a state, dealing with exemptions, discounts, gift certificates and coupons, shipping fees, and travel fees. If you have sales tax questions, these guides have your answers. More states are being added regularly.
Disclaimer: The information provided above is not provided in the course of an attorney-client relationship, is not intended to constitute legal advice, and does not create an attorney-client relationship. While the author is a licensed attorney, all information provided is for self-help and general informational and educational purposes only.