Sales tax is difficult for photographers and photography businesses. A question that comes up over and over from photographers is “am I supposed to charge sales tax to an out of state client?” This opens the door for all other sorts of more specific and more confusing questions, including:
“Am I supposed to charge sales tax when I shoot weddings in other states?”
“Do I charge sales tax at the rate where my business is located, or at the rate in the other state?”
“Do I charge my Florida client Massachusetts sales tax since the wedding was in Cape Cod and I am required to collect Massachusetts tax?”
You get the idea, there are numerous variations and lots of confusion, rightfully so.
The answers are complex because they hinge on the specifics of the transactions, including the locations of the parties involved in the transaction, as well as where the photographer performs their photography services (i.e. where are they really doing business) and where the products (such as a DVD, thumb drive of images, albums, etc.) were delivered.
Understanding the taxability of inter-state transactions (transactions between states) is critical for wedding photographers who travel state to state and also for portrait photographers who live in areas like the northeast, where states are close together. When you are operating a business where states are close together, it is inevitable that you will be photographing in a state outside the state of where your business is physically located.
This post is the first of a series of posts addressing these questions. Like I said, it is complex, so I want to start off with some of the basics. A basic concept in this puzzle is a thing called Nexus.
Nexus refers to a connection, link or tie.
When you have nexus in a state, in terms of discussing sales tax, it means that you have a duty to register and collect sales tax in that state, for taxable transactions.
The constitution guides nexus issues, with the stronger arguments being under the Commerce Clause, but the Due Process Clause is sometimes utilized. The Commerce Clause deals with the Federal Government’s power to regulate commerce between states. There are several huge court cases that focused on nexus issues, National Bellas Hess, Complete Auto, and Quill Corporation. Yes, this is legal mumbo jumbo, but this info may be of interest as a background:
Complete Auto Transit, Inc. v. Brady, 97 S. Ct. 1076 (1977) - The U.S. Supreme Court held that to be subject to tax in a state, a taxpayer must have a “substantial nexus” with the state.
Quill Corporation v. North Dakota, 112 S. Ct. 1912 (1992) - For sales and use tax purposes, the Supreme Court held that a taxpayer must have a physical presence in the state.
Possible Nexus Creating Activities (reasons you may have to collect sales tax in another state)
- You enter that state to photograph a person, a wedding, an event, etc.
- You sell items at a trade show in a state (WPPI, almost every vendor should have charged NV sales tax, I doubt they did)
- You have an employee in the state, and it doesn’t matter whether or not they sell for you
- Unrelated agents, independent sales agents that might even represent another company
Yes, you read number 1 correctly. In general, if you physically go into a state and photograph in that state, you have created nexus for your photography business. This is because you are physically in that state doing business. I say “in general” because state laws vary, and depending on the state, this physical presence you have created for your business may trigger a variety of obligations, which will not necessarily be the same from state to state.
For example, Illinois state law treats in-state retailers and out-of-state retailers differently. But you would have to look at how those types of retailers are defined under the law to determine which one you are considered. This adds another layer of complexity when trying to determine sales tax obligations for your photography business.
Please keep in mind that I am talking about “taxable transactions.” A New Hampshire photographer could regularly travel to Massachusetts to shoot weddings and portraits, but always have their clients pick up any tangible products, such as a wedding album, at their New Hampshire studio. Since there is no sales tax in New Hampshire and the tangible album is transferred to the client in New Hampshire, there is no sales tax on the transaction. Did that just blow your mind? I said this whole sales tax thing was complex…
And now what….
What happens if you have just read this post and realize that you need to be collecting sales tax in other states in addition to the home state of your business (where you business is physically located)?
Many states offer a Voluntary Disclosure Program for people like you. It is an incentive to start complying with sales tax collection requirements and usually offers the advantage of a limited look back period (for example they only look at taxable sales for the past 3 year vs. 10 years), and often penalties and interest won’t apply.
If you don’t register, and you let them find you first, the look back period not only can be 7 to 10 years, but penalties and interest can sometimes add up to 60-70%. I know that sounds crazy, but those numbers are VERY real.
And I sense that several photographers might be thinking that they won’t be found. Did you know that some states actually offer a bounty of up to 30%….this means that either a disgruntled employee, or a competitor can submit your name to the state they know you should be collecting sales tax in and that state will give them a finders fee for calling you, the taxpayer out.
And here are some statistics as to approximately how many state auditors are employed:
- Texas – 600 auditors
- California – 800 auditors
- States like New York and Florida have 500 auditors each
There are lots of auditors out there looking for you and it might just be a matter of time until they find you. It is important to comply with not only your home state’s sales tax laws, but also those of other states in which you have created nexus, due to your activities. If you are unsure as to whether you have nexus in a particular state based on your transactions in that state, just call up the State’s Department of Revenue or visit their website. Nexus can be tricky and it certainly isn’t always black and white.
The bottom line is that as photographers, especially wedding photographers, we are regularly traveling into other states. If I have a client in Rhode Island and I physically enter Rhode Island to shoot their wedding, I must charge Rhode Island sales tax to that client (with the assumption that the transaction/service is taxable due to tangible transfer of images on DVD) and submit it to the Rhode Island Department of Revenue. It does not matter that I am a resident of Massachusetts, and that my business is located in Massachusetts. I enter Rhode Island to shoot weddings and therefore I have the obligation to register and collect sales tax from Rhode Island clients.
I hope this was helpful and stay tuned for the next part of this series where I dig deeper and get into more specific transactions and what you need to watch out for to keep your business business profits safe.