Business Question

[prenning]

I need some advice.

I've got the DBA, and I'm in the process of completing the Texas sales tax application.

However, all of my business at present is done via Smugmug. I post the pictures, and the clients order online. Supposedly, I'm supposed to collect sales tax on not only the product, but the shipping as well. No problem with the pictures as Smugmug tells me the amount of the order, but I have no idea how much is paid by the client in shipping. Do I even need to collect sales tax as SmugMug views me as an independent contractor and they pay me on a 1099?

Any advice from someone else in this boat? Last thing I want to do is start off with the State on the wrong foot.

Regards.

Paul
www.tejas-images.com

[DeLeon]

I would contact the comptrollers office to be certain. I know that shipping is taxable, but you are not the one charging the shipping in this case.

[charlya]

Please let us know what you find out because I am doing the same thing via Exposure Manager.

Originally Posted by DeLeon

I would contact the comptrollers office to be certain. I know that shipping is taxable, but you are not the one charging the shipping in this case.

[HotHolly]

The comptroller is VERY helpful. Be nice and they will be your BF. We used Pictology and were able to adjust for the taxes on the S&H. We were also the ones that set the S&H rate, so I know what it was. I'd call and ask. They seem to say the opposite of what you'd think. And then there are a ton of little rules, regulations, and exceptions. Cover your butt and ask. You don't want to mess up your taxes.

[cmalana]

If you are selling through smugmug, be sure to familiarize yourself with the fine print. We use exposuremanager (which is similar, I think), and with them, I do not sell the images/prints to the client, but I charge ExposureManager a 'royalty fee' or 'commission' for each product sold. In our books, revenue from those online galleries are reflected as "Commissions Earned" so it is not part of revenue that would apply for sales tax calculation. We do not do any self-fulfillment options either.

[bondarnes]

Originally Posted by cmalana

If you are selling through smugmug, be sure to familiarize yourself with the fine print. We use exposuremanager (which is similar, I think), and with them, I do not sell the images/prints to the client, but I charge ExposureManager a 'royalty fee' or 'commission' for each product sold. In our books, revenue from those online galleries are reflected as "Commissions Earned" so it is not part of revenue that would apply for sales tax calculation. We do not do any self-fulfillment options either.

I understand what you are doing, but I think the comptroller would have a different take on the situation. Did you run this by a competent CPA or a tax attorney? I wouldn't want to be in your shoes when they come for an audit. The State always gets their money. I look at sales tax as a pass through expense and I collect it on EVERYTHING. The only two exceptions are tax exempt organizations and some out of state work.

[adirty1]

i agree i collect it on everything unless they are exempt. I write up a total include shipping in texas and slap on the 8.25

[cmalana]

Hey Don- the ExposureManager agreement is there for all to see. They are a board sponsor as well so perhaps they can clarify this question.

In my opinion, it is the responsibility of a business to collect the right amount of taxes - no more, no less.

[prenning]

I ran this by the State. Here was my initial email:

Hi,

I'm in the process of building a photography business.

My plan is to take photos of sporting events and post the digital photographs through one of the many sites that host photos and then allow parents to purchase the photos from that site.

Given that I'm providing a service, I can understand that there is likely to be sales taxes involved. What I'm unsure about is how much.

First, the photos are being hosted on a website that is in another state (California), and the order is actually being fulfilled by a service bureau in a second state (Georgia). The hosting company can let me know the amount of the order but they are unable to tell me how much the client has paid for shipping and handling. It is my understanding that I need to charge sales tax on the purchase AND on shipping and handling, but I'm only aware of one of the amounts. The hosting company has indicated to me that they are the ones "doing the selling" and that I get paid as an independent contractor via a 1099, and as such I don't have to worry about sales taxes. Somehow, I don't think that's the correct answer.

Can you provide me with guidance on how to handle my sales tax liability (I don't think its a question of if but how much) for proper reporting?

The first response I received was as follows:

Dear Mr. Renning:



Thank you for your recent email regarding your photography business. You plan to upload your photographs to a website in California that specializes in such sales. Buyers would then contact an online service bureau in Georgia to order prints. You contend that those folks are making the sale and that you are paid for your work and receive a 1099 for Federal Income Tax reporting.



Tax Code Chapter 151 imposes sales tax on sales of tangible property and taxable services. Photographs fall within the definition of tangible property. The tax is computed on the sales price and includes the total charge made including handling and delivery charges. I will have to review a copy of your contract with the sales and hosting firm to determine who is liable to collect Texas state and local tax but the tax is definitely due on sales of pictures delivered to Texas recipients.



The out-of-state firm is engaged in business in Texas by virtue of using you to take photos and upload them their website. See Rule 3.286 (a) (1). In the event they are found to be the seller, they will be responsible to obtain a Texas Sales and Use Tax permit and to collect and remit our tax on the total sales price of the photos. That also applies to you if you are found to be the seller to the end user.



You may click on Apply for a Sales Tax Permit Online to begin the online application process. Additional information is at Sales Tax and Your New Business. I have attached rules regarding records required and seller’s responsibilities for your review.



I have included an email to a similarly situated taxpayer at the end of this email. It has been edited for confidentiality but contains all the salient points. You may send me a copy of your contract with the out-of-state firm by return email and I will be glad to respond.



This opinion is based on the facts you presented. Other facts, though similar, may yield different results.



If you need more information, please email tax.help@cpa.state.tx.us, or call toll-free 1-800-531-5441.



Sincerely,



Al Van Allen

Tax Policy Division



Enclosures





January 18, 2006

XXXXXXX

XXXXXXX



Dear XXXX:



Thank you for your e-mail questions about Texas sales tax and your photography business. I have addressed each of your questions below.



1. “We have a small photography business. When we take pictures, we upload the digital files via FTP to an online hosting company in California. Our clients can go online and purchase images from this company (XXXX.com). XXXX sends the finished images to our clients. They do not charge the clients tax because they do not live in California. My questions are: Are we required to pay sales tax on these sales?’



Response: You are considered the seller of the finished photographs and products, so you would collect and remit state and local sales tax on the total charge to your clients. XXXXXXX is providing you with web space for you to maintain a “storefront” operation and, thus, you are still responsible for the collection of Texas sales tax for photographs sold to Texas residents. Texas sales and use tax is due on sales made by Internet or catalog order if you are engaged in business in Texas as defined in Comptroller Rule 3.286.



The sale of photographs is the taxable sale of tangible personal property. A photographer must collect sales tax on the entire charge for the finished product (including sitting fees), whether the billing is lump sum or separated, except for separately itemized expenses not connected to the production of the photographs being sold (e.g., consultation fees and itemized charges for expenses and professional services incurred prior to an agreement to produce a photograph and prior to the first production stage of the photograph to be transferred). A sitting fee is not subject to sales tax when the client fails to purchase any prints, negatives or transparencies.



The arrangement you have with the XXXXXX, in California allows you to submit pictures to be posted on the Internet for customer viewing. The customer places and pays for an order for finished products directly through the website. A review of XXXXXX’s website reveals that you are responsible for establishing the sales price. Each month, XXXXXXX sends you a check for orders received less any expenses incurred.



The charges by XXXXX to store a web page on a website is subject to Texas use tax as a data processing service. Twenty percent of the charge for data processing services is exempt from Texas tax. See Rule 3.330 for further information regarding data processing services.



2. “My question is: Do we pay taxes on the professional fees we charge our customers? These fees do not include any products like prints, only the charge for our services for taking the images, retouching, and uploading to XXXXXX.”



Response: A photographic sitting fee that does not result in the sale of a finished product is not taxable. A sitting charge is not subject to sales tax when the client fails to purchase any prints, negatives or CD from you.



When your client purchases a product, then you have a taxable sale. When billing a client for finished photographs, you must collect sales tax on the entire charge, including itemized costs or expenses related to the taxable sale. This includes processing fees, sitting fees, proof charges, mileage, labor (including overtime) and rush charges.



3. “When we book a wedding, we ask customers to pay us 50% at the time of booking of the sitting, and the balance two weeks prior to the ceremony. We do not normally ask them to pay the sales tax up front because we sometimes do not know all the products that will be purchased at that time. (Brides usually need time to think about how many "Parent and Grandparent Albums" they will need and the frame style for their Bridal portrait, so we firm this up at the final consultation 2 weeks prior to the wedding.) I have several weddings that I collected monies when I booked the weddings in 2005 that I do not have the balance yet, because the weddings are not taking place until 2006. My question is: Do we need to pay an estimation of the tax I think we will owe after the bride makes selections on product?”



Response: The booking or sitting fee is not taxable until the client purchases the finished product. When you do bill the client for the finished photographs, you must collect sales tax on the entire charge, including itemized costs or expenses related to the taxable sale. This includes processing fees, sitting fees, proof charges, mileage, labor (including overtime) and rush charges. The date of the sale is when you deliver the finished photographs to the client.



4. My question is: If I give (free prints) a customer 25 prints of images we take of them as a couple for their engagement shoot as part of our marketing to them for their wedding business, do I charge them tax on the normal price of these prints? Do I pay sales tax to the lab that prints the prints for us, if I am going to give them to a client for marketing? Do I pay sales tax on the DVD covers I purchase to use to put slideshow presentations in for clients’ images?



Response: If you give the prints to the customer at no charge, then you have not sold them and, therefore, you do not collect sales tax from the client.



A photographer is considered a manufacturer. Your purchases of cameras, lenses, film, disks and batteries may be made tax-free by giving exemption certificates to your suppliers in lieu of tax. Once you give away any of these tax-free items, they have left your tax-free inventory. You owe tax on the actual amount that you paid for those items removed from your tax-free inventory. So, you would owe tax on the lab printing charge, DVD cover and any other items used to provide the free prints. You may wish to review Comptroller Rule 3.300 concerning manufacturing exemptions. Subsection (k) of the rule addresses divergent use. It is available through our Web site at http://www.window.state.tx.us/taxinfo/sales/. Click on “Rules” for Rule 3.300 and the other rules noted above.


This opinion is based on the facts presented. Other facts, though similar, may result in different answers.

I hope this information is helpful. I'll be glad to help you if you have additional questions. My direct telephone line in Austin is (512) 936-6103. The toll-free number is 1-800-531-5441, ext. 6-6103.

Our goal is to provide you with prompt, professional service. Please take a moment to complete our on-line survey at http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

Sincerely,

Debbie Wheeler
Tax Policy Division
Texas Comptroller of Public Accounts
debbie.wheeler@cpa.state.tx.us

So I asked for some additional clarification:

Mr. Van Allen:

I want to thank you for your response. In general, I agree with everything that you state. The problem is computing sales tax on shipping and handling. My preferred hosting company will only tell me the amount of the sale sans the exact amount that the customer paid for shipping and handling. At best, they tell me the method that the customer chose. If I use a logical and common sense approach to try to deduce the amount of sales tax owed on the shipping and handling, is that something that will pass a sniff test should I be audited? I realize that's an open ended question, but short of getting the exact dollar amount from the hosting company or client, I really don't think I have any other choice.

Unfortunately, there isn't a contract with either of the companies that I am considering. Links to the features that I am considering are here http://www.exposuremanager.com/scrip....pl?rm=selling (Exposure Manager) and here http://www.smugmug.com/pro/ (SmugMug). In asking about sales tax with SmugMug's customer support, I received the following:

"As a California based company, we only charge sales tax on orders delivered to California. Please keep in mind that we are the ones doing the "selling". You are an independent contractor (W-9/1099) who works for us when we sell your prints."

I doubt this changes anything, so I'll begin trying to figure out how to compute sales tax on shipping and handling.

Kind regards,

Paul Renning

His reply didn't exactly bring tears of joy to my eyes:

From an audit stand point this scares me, Mr. Renning. The firms you are considering are effectively denying you the opportunity to comply with Texas tax law. It may be potentially lucrative but in the event of audit, if the auditor makes an estimate higher than you like, how do you refute it?

I think I'll be looking at either another hosting site that allows control over the fine details of the shopping cart, i.e. the ability to collect sales tax, or begin considering self-fulfillment, which is not something that I really want to deal with right now. Any recommendations on other sites that offer high quality photos with this level of control?

Thks.

Paul

[Wil_Bloodworth]

Originally Posted by prenning

"As a California based company, we only charge sales tax on orders delivered to California. Please [B]keep in mind that we are the ones doing the "selling". You are an independent contractor (W-9/1099) who works for us when we sell your prints.[B]"

Seems quite "cut and dried" to me. You filled out a 1099 when you signed up with SmugMug (as did I). Therefore, you're off the hook on taxes. It's that simple. Really. You haven't sold anything to anyone. You simply are paid by your employer (SmugMug). Now, you do have to pay income taxes on that money to the Fed.

I would, and am, taking my chances. The law is quite clear and the state would not win this one. Unless I sell something directly to someone in Texas, I am not under any contract to collect sales tax.

- Wil

[Wil_Bloodworth]

Even better... sell prints on edible paper! HA HA! Now you're selling a non-taxable item! LOL!

- Wil

[RiverSide]

hmm so if u charge them everything in the sitting fee but give out the prints for free.. does that mean no Sales Tax applies?