Ivan Makarov Blog

When I first published a post about tax applications of being a part-time photographer, the question I was asked more than any other was, what about sales tax? So this post  will address that question for photographers residing in California. The problem is, sales tax rules vary from state to state, and in fact, a few states don’t even have sales tax. But I thought I would at least address my own state, as I know many of this blog’s readers are from California and may find this information useful. Those who reside in other states may also find this helpful, as states tend to have similar rules.

What will follow are the tips that are considered to be general sales tax knowledge and do not represent official interpretations of the tax law found in the Internal Revenue Code, regulations, rulings and state law. My views also do not represent the views of my employer, and this blog is not affiliated with it in any way. Everything that is written in this post was not intended or written to be used, for the purpose of avoiding U.S. federal, state or local tax penalties.

1. Where to Find the Law. First, and most useful source of information, of course, is a tax law itself. Sales tax law for photographers, photo finisher and photocopiers is currently found in Regulation 1528 (originally issued in 1951) and you may find the copy of it here. It’s not very long, and every Californian photographer should read it. Second, since regulation is not long and is somewhat general (and yes, written back in 1951), it’s useful to read the current publication issued by the State Board of Equalization ion 2007, that gives further guidance helping photographers understand the application of the sales and use tax to various scenarios, titled “Tax Tips for Photographers, Photo Finishers, and Film Processing Laboratories“. Each state typically has a similar publication available, and I definitely recommend finding it and reading it thoroughly periodically, if you want to avoid the pain of audits, penalties, interest and fees assessed against you. I recommend spending some time on the State Board of Equalization web-site where you’ll find all kinds of other useful and applicable information on how to stay compliant with sales tax rules. Finally, if none of these publications make sense to you, it’s a good sign you need to spend some time talking about this with your CPA or tax advisor.

2. When Sales Tax is Due. I pick those up from the Tax Tips publication above, but here is a brief summary of key points that every California photographer should remember when making sales.

• Generally, all sales of merchandise in California is subject to sales tax, unless an exception applies
• Labor may also be taxable (for example, matting prints, retouching images, custom cropping, and so forth)
• Photographers must collect sales tax from their customers when creating a photographic product when it becomes a physical object (a print, or digital file delivered on a physical store medium, such as a disk, DVD, CD, or flash memory card)
• If at any any point of time you delivered a photo product on a physical medium or an object, the whole sale becomes taxable. So for example, if you are shooting a wedding and delivering an album to your clients or a few prints, the whole fee they paid you for a wedding becomes subject to state tax
• Sales of capital assets that you have used in a business are also subject to sales tax. Yes, it means that you should collect sales tax for that used camera body or a lens you’re selling to someone else

3. When Sales Tax is Not Due.

• If you transfer a photograph electronically (for example, you upload it to a web-site or send it via email) to a customer, and you do not include any physical product in your sale, sales tax does not apply. To clarify this, you are simply delivering an image to your client after a shoot (for example, a family portrait session), and you’re not transferring copyright or licensing an image for an advertising campaign.
• Make sure you properly document it by keeping a copy of an email or a screenshot of FTP folder where you uploaded that file in case state auditor wants to see a proof of why you did not collect sales tax on that particular sale
• The sale of prints, services or other good to customers who live outside of California is generally not taxable, provided you ship the items directly to a customer at a destination outside the state and you use your own business vehicles or common mail carries to do so. Again, keep good records of that for the future
• If you’re shipping an item to a California resident at an out-of-state address, you must collect use tax, unless you get a written statement signed by the purchasor stating that the item is purchased for out-of-state use for more than 90 days from the purchase date
• Sales tax does not apply to sales made to U.S. government or to government-related corporations
• Shipping charges are typically not subject to sales tax if they are stated separately on the invoice
• The sales and use tax rules with regard to transferring a copyright or licensing an imagine to stock agencies, newspapers, magazines, advertising agencies and so forth are more complex, and I will address them separately in a future post.

4. Reporting Requirements

• Ultimately, you are responsible for paying sales tax on all of your taxable sales. Of course, you collect it from a customer, but if you failed to do so, when audited, the state will ask you to pay the sales tax regardless, and it might not be very convenient to track down a customer who bought a print from you five years ago and ask her to pay the sales tax on that purchase, five years later
• You must report all of your sales on your sales and use tax return, including nontaxable sales. In other words, you must file sales and use tax return every year or every quarter, even if you’re not making a lot of taxable sales within California
• If you don’t already own a California Seller’s Permit, you better get one now, as this is the first thing the auditor may ask to see
• When you’re assessed late tax, the additional penalties for non payment can be as high as 10% of sales tax assessed, plus interest

As always, please ask questions in comments and I hope I can help you find answers.