A snapshot of sales/use tax on photography services

DOR has recently published Directive 11-4 clarifying the circumstances under which charges of professional photographers to their Massachusetts customers are subject to sales tax or are exempt.

If you're heading toward a wedding, a few minutes of reading time here could save you and the bride- or groom-to-be a few bucks, or at least explain the possible sales tax implications for your wedding photography or videography (the same rules apply to both).

Generally, the sales tax applies to any sale at retail by any vendor of tangible personal property, so it is clear that a conventional wedding album or a DVD of wedding photos generates a sales tax.

But assembling photos in an album or DVD is no longer the sole method of delivering a photography product such as wedding pictures to a client, which makes a world of difference in sales tax. A wedding album or DVD is a product delivered to the purchaser in a tangible medium. You can put your hands on it, and so it is taxed as tangible personal property.

However, wedding photos delivered in a digital file via the Internet are not subject to Massachusetts sales tax because there is no transfer of tangible personal property as contemplated in MGL Chapter 64H Sec. 1.

So how does this work in practice? Let's say you contract with a photographer to pay $3,500 for photography services on your wedding day, and also contract to pay $500 for a DVD of the photos. The $4,000 total is subject to sales tax because the photographer produced a tangible product which you are contractually obligated to purchase.

Using the same example ($3,500 to pay for taking photos at the wedding), the photos are this time delivered from the photographer's File Transfer Protocol (FTP) site via the Internet. Since no tangible personal property has been produced, there is no tax owed for the photography. However, if a photo album or DVD is also produced as part of the package, the entire cost of photography and the photo album are taxable.

The production of tangible personal property, as opposed to an internet file that is intangible, is the key determinant as to whether sales tax is charged.

Are flash bulbs popping?

Let's switch the field of vision to portrait photography.

It has been clear, at least since an Appellate Tax Board case in 1992, that a portrait photographer's separately stated charges for "sitting fees" constitute a distinct service transaction, and, as such, are not subject to sales tax even in a case where a tangible product such as a DVD is created.If not separately stated, however, the sitting fee and tangible photographic product such as a DVD are both subject to tax.

Let's say the photographer charges $200 for a sitting fee and $300 for a DVD of photos taken. The invoice to the customer separately states the two charges. Sales tax is due only on the photos.

(Recall that the 1992 ATB decision addressed only portrait studio sitting fees, leaving aside other separately stated charges of photographers hired for an event such as a wedding. The ATB determined that for purposes of calculating sales tax a sitting fee in a portrait studio may be tax exempt, but the decision did not extend the notion of a sitting fee to apply to a photographer's out-of-studio work in shooting a wedding album.)

How about a portrait photographer whose $500 fee includes a sitting fee for up to an hour as well as the transfer of 40 digital images provided to the client via download from the photographer's FTP site? Since no tangible personal property has been created, there is no sales tax.

The same principle of tangible vs. intangible extends to other types of digital downloads including music and books. Buy a CD or a book and sales tax is charged; buy a music download or a book on Nook or Kindle and no sales tax is charged.

But a purchase of software downloaded electronically is specifically mentioned in 64H Section 1 and thus is taxable. The law reads that "A transfer of standardized computer software, including but not limited to electronic, telephonic, or similar transfer, shall also be considered a transfer of tangible personal property."

 

Comments

[Robert Bliss]

Vanity,
As we have previously pointed out in the series of postings on this subject, the sitting fee for a portrait rule comes directly from an ATB decision on those limited facts. The other rules in the Directive are based on the general sales tax statutory rule that services used to make a product are included in the sales price. So, for example, you couldn't sell a table for $500 and separately state the labor to make the table at $400 and materials at $100 and just collect tax on $100. In the case where the photographer's contract with the customer does not obligate the customer to purchase any tangible items, such as prints or a DVD, then the charges for the service alone are not taxable. If the customer is not required to purchase prints but may do so through an independent vendor, then that vendor's obligation to collect tax may depend on whether it has physical presence in Massachusetts. However, DOR has cautioned photographers that entering into such arrangements with non-nexus out-of-state vendors may subject the photographer to an assessment under the sham transaction/tax avoidance rule in General Laws Chapter 62C, section 3A.

[Vanity business in transition]

I have another question. I know this article is a few months old but I'll be trying anyway:

What is the difference between the "sitting fee" for portraits and the wedding session plus DVD? Why would you be able to separate things out for the portrait session (untaxed sitting fee + taxed DVD) but not in the wedding example (service + DVD fully taxable)? If I shoot an event and charge for the service and any prints separately would the MA sales tax only apply to the prints or to the whole business transaction?

And what happens if the prints come directly from a third party vendor in a different state (marketed through zenfolio-type model for example)?

[Robert Bliss]

Ryan, sharp question and you may like the answer. Since Doris and Dean were not contractually obligated to purchase an album at the time they paid $1,000 for photography services, they are now under no obligation to pay sales tax for the services retroactively, although they will be charged sales tax for the album.

[Ryan Richardson]

Could I ask about a clarification?

John and Jane want photos of their wedding. They buy a package with coverage and an album worth, let's say, $2,500. Because it's all one sales transaction, the whole amount is subject to sales tax.

Doris and Dean want photos of their wedding. They purchase a package that only includes coverage for $1,000. Since no goods are delivered there is no sales tax. Later (after counting all the checks they got as gifts), they return and want to purchase an album for $1,500. Would the sales tax then only apply to the album, since it was not part of the original sales agreement?