At this point in our revamp series we’re going to talk a little bit about sales taxes. I know sales taxes are so confusing to some business owners, especially when you’re new. There’s so much paperwork and numbers involved and a lot of photographers just want to sit down and cry when thinking about all this official crap. That’s why I’ll be breaking down some sales tax questions for you today so you can get a better handle on what exactly they are, where to start, and how it affects you!
1. What is Sales Tax?
Sales tax is a tax paid to the government when an item is purchased or a service rendered. Sales taxes are not related to income taxes at all. They are collected by a different governing body, paid at a different time of year and don’t quite work the same. When you, as a business owner, collect sales tax from sales to your clients you are acting as a third party. You are merely collecting the tax on behalf of the government and sending it to them at a later date. Income taxes are different and are a tax directly on you and the income you bring in.
In the US, not every state collects sales tax from sales, and not every state calls sales tax the same thing. Some states call your sales tax license a Sellers Permit, some places call sales tax “transactional privilege taxes.” However, they’re all basically a same thing, a tax paid to the government on behalf of goods or services purchased.
2. Do I Have to Collect Sales Tax?
Probably. Depending on your state and your business you will most likely come to the conclusion you need to collect sales taxes as a business owner. There will be some circumstances where you don’t (like maybe you live in a state that doesn’t have sales tax).
Here’s where we get into icky questions about sales tax. I’ve heard some hobbyists claim they don’t need to collect sales tax, however, in most cases this is untrue. If you are being paid for a service (whether you are a registered business or not) you need to look into sales taxes for your state and make sure you are properly licensed. Anytime someone is paying you for something you are conducting business. Some states even require garage sales to carry a temporary sales tax license. Technically they’re not an official business either, but because they’re being paid for something most-likely the government wants their cut.
Even if you think you might not have to collect sales tax because of the way your business is structured I would recommend you call your state’s revenue service and make sure that a sales tax license doesn’t apply to you. It’s not a good idea to just assume, always check with the authorities and make sure. Most photographers are going to need to have a sales tax license.
3. How Do I Collect, Report and Pay Sales Taxes?
In order to collect sales taxes you need to have your license (or permit) to do so. You will get your sales tax license through your state’s revenue service. You can easily go online and find out more information or call them if you need to. You’ll have to fill out an application, send it in and most of the time they send you an official license to display when you are doing business transactions as well as some information on the where, when, and how to submit your taxes after you’ve collected them.
It’s also important to keep in mind that sometimes the state isn’t the only jurisdiction collecting sales taxes. Cities can be what we call “home-ruled” and have their own sales tax license and do their own collections. In that case you may have more than one license.
Every state works a little differently, so when it comes to how much to collect, where to report it, and pay it – every answer is going to be a little bit different. For smaller business owners you most likely won’t have to send in taxes every month, but many photographers pay their taxes quarterly or annually depending on what their tax jurisdictions require. Whenever your sales taxes are due you are sent a small form (kind of like when the IRS sends you a 1040 in January) and it’s your job to have kept a record throughout the year or whatever time period you’re collecting for, report that on the form, and send it in with your check. Like income taxes, sales taxes can have added late fees and fines if you don’t file them on time. You can also be audited with your sales taxes, so it’s important to take your record-keeping seriously and make sure you have everything in order.
4. What Do I Charge Sales Tax On?
Typically sales tax is only charged on tangible items. Tangible items are something that we can hold in our hands. However, again, the specific laws of your state and other tax jurisdictions can differ greatly. In many states a service that results in a tangible item will require tax on the entire service. In some states you’d only have to charge sales tax on prints. There is absolutely NO one good answer for this.
One mistake I often see happen here is that we go into an awesome Facebook group and ask there, but there’s so many different answers because people come from all different states, cities, and backgrounds. Some photographers are getting their advice from their CPA, some from a lawyer and others from the grapevine. My recommendation to you is to IGNORE ALL THSOE PEOPLE. Ignore your CPA. Your CPA is a specialist in accounting, most CPAs do not have sales tax knowledge and explicit knowledge of the laws specific to your state. A lawyer may also not know, since they may not have a good hand on accounting and business licensing. The photographer from down the street may or may not know either, depending on where they got their information from. Please, whatever your sales tax question, ALWAYS ALWAYS ALWAYS call your state revenue service to clarify what needs to be taxed. If you are not getting your information directly from your state revenue service and you collect incorrectly, and are then audited and owe money – you cannot get out of that audit by saying your CPA, lawyer or another photographer down the street told you to do it this way. The only place that has jurisdiction on this is your revenue service. Always call them to get the correct information. When you do, record the time and date you called, the employee name who you talked to and that way if anything ever goes wrong, you have them to fall back on. Having been audited by my state’s revenue service I can tell you from experience that their knowledge is absolutely priceless and I don’t listen to anyone else.
5. What’s the Lowdown on Digital Files and Sales Taxes, Really?
Your next question is probably, are digital files a tangible item? Again, the answer to this question is that it will vary by state. Many state are continually changing the law by changing the definition of “tangible” to make digital files either taxable or nontaxable. The best place to get information on how to tax digital files is directly from your state’s revenue service.
What is Use Tax?
What? Use tax? You’re probably wondering what this has to do with sales tax at all, right? Well, in many states or tax jurisdictions (cities, etc.) you may get a sales tax license that also includes information about use tax. Use tax is typically a tax charged to a business on purchases that were made tax free because you bought business items online, or outside of your own municipality. It means that at the end of the year you may have to go back and pay taxes on items you purchased tax free. I know, it sounds super annoying, but it’s just one way that your local governments find to tax business owners. Some states or local governments don’t do use taxes, but may do business property taxes, which are very similar. Use taxes and business property taxes are usually filed annually. You’ll want to record any purchases you’ve made that you got tax free just in case you owe later. Follow the directions sent by your revenue service or tax jurisdictions on how to file, and if you’re confused, always call them directly for help (have I said that enough, yet?!).
6. What Kinds of Records Should I Keep for Sales and Use Tax?
Depending on how complex your sales tax system is where you are located and how you operate your business your records may vary. Regardless, you need to keep sales tax logs of how much you collected, who you collected it from, what you sold and collected on, and what tax jurisdictions those sales taxes go to (state, county, city, etc.). This will make your sales tax life so much easier at the end of the year, I promise. If you’re the kind of photographer who likes to write things down, like me, you can find sales tax logs and use tax logs in the shop!