This is a very popular topic and one that can be incredibly confusing for photographers! So, I wanted to put together a little guide for you on how to see if your digital files need to be taxed, how they need to be taxed and how to deal with all of that. This guide is probably best for US residents, unfortunately, being a US resident myself I really have no experience and knowledge on tax systems outside of our borders.
Step 1 – Call Your State Revenue Service
As always, the best place for you to get answers for sales tax questions is straight from your state’s revenue service. This is really the only way to accurately know for sure what you need to be doing. Sure, you can ask a CPA or your friend who is a photographer and they might be awesome people, but you won’t know for sure that their knowledge is correct unless you contact the source. That’s why this is so important. When it comes to something as official and legal as sales taxes, it is best to get your information directly from the source.
When you call, you might have some trouble getting the information, but you need to explain your business model, how you charge for digital files and ask if your state has a special law for digital download taxing, if they don’t tax digital downloads, or if they consider digital downloads a tangible item.
In my experience doing research and calling state revenue services on your behalf for the >Get Legit Workshops< states tend to fall into one of those three areas. There are a lot of states that do tax digital downloads and consider them a tangible item and taxable under their general sales tax laws. You definitely don’t want to be caught in the future not taxing when you should, which is why you need to take the initiative to call the right place and ensure you have the right information.
Step 2 – Set up your Sales Taxes
Once you know if your state taxes digital downloads it will be up to you to ensure you set it up in your business model to ensure you are taxing the item. I’m assuming you already have a sales tax license for your state too at this point. If you don’t have one, you must have one to collect sales taxes. There are a few states where the law dictates that a service that results in a product is a service that can be taxed. Again, this is something you will be able to verify when you are in touch with your state’s revenue service and you can charge sales tax accordingly.
If your state does not charge sales tax on your services you can set up your business in one of two ways. Option one would be where your clients pay a session fee and no products are included in that fee and all products are purchased separately. In this case you would be able to easily add sales tax where needed. The other option would be a business model where you charge a session fee and it includes some amount of products and digital downloads (or just digital files). If your service includes product you have to charge sales tax on the entire service.
Step 3 – Run with it
Once you have it all figured out you are set. Just remember that the best resource for sales taxes and exactly what you will have to charge is going to be your state’s revenue service. One last thing to keep in mind is that digital downloads and sales tax laws are changing fast to keep up with the world’s technology needs. What you might have heard of as true last year with regards to sales taxes may be different this year. You’ll need to be on the lookout for changing laws and regulations regarding digital downloads.