How is it that the discussion of sales tax can cause such passionate battles in photography forums, message boards, and Facebook groups, especially the taxability of digital images? I don’t quite get it, maybe that’s the attorney in me. But the fact that people get so passionate about having the right answer for any given sales tax question in their state is amusing!
Right off the bat, I can tell you that the taxability of digital images varies from state to state. Electronically delivered photos are treated differently from one state to the next…so depending on where you are doing business, the answer will vary.
Anyway, I randomly chose California today so that we could speak about how to deal with the application of sales tax to electronically downloaded, or electronically transferred images. The great thing is — the downloading of digital photographs is not taxable in California BUT be forewarned: this same method of delivery may be taxable in other states.
For example, if you were hired by a real estate agent to take some head shots and the head shot images were going to be delivered to her via digital download (either a file attached to an email or via download from an online gallery), the entire transaction would be exempt from tax.
If you do not include any physical product in your sale, tax does not apply. But once you provide your client with a copy of the electronically transferred photographs in any type of tangible form such as on a CD or flash drive, or provide them with an 8×10 or album, then the entire transaction (fabrication labor and tangible items) will be subject to sales tax.
You should document any electronic transfers of photographs to protect yourself if you are ever audited. You will need to be able to show the auditors show why sales tax did not apply to the transaction.
The California Board of Equalization suggests the following:
If you electronically sent a photo to a customer by email, you should print out the copy of the email and place it in your records.
If you transferred a photo to a customer via FTP or download onto their computer, you should document the transfer in your records by placing a file into your project file. This document should list the customer’s name along with the date and method of the transfer, noting that no physical products in addition to the electronic transfer were provided. Then have your customer sign and date the document at the time of transfer.
Be sure that you are doing all that you can, and the best that you can, to ensure you can provide proof to the auditors that the images were delivered via digital delivery and that you are NOT in the wrong for not collecting sales tax on the transaction.
CALIFORNIA SALES TAX TIP:
The California Board of Equalization provides the following language as a suggestion in Publication 68:
“This electronic photographic image was loaded into the computer of [client’s name] by [photographer’s name], and [photographer’s name] did not transfer any tangible personal property containing the image, such as electronic media or prints, to [client’s name].”
For more Sales Tax information specific to the state of California visit the California BOE Website.