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Should You Be Charging Your Customers Sales Tax?
May 23, 2012
The other day we had a client come into our office for a consultation. One of his questions concerned the taxability of photography services, as he was opening a photography business. He’d heard from some people that it was a service so it was tax exempt. Yet others had said to only charge tax on the cost of the photo paper, frames, albums, etc. A few had even suggested that he charge sales taxes on the whole amount. Well, turns out that everyone should have bought a lotto ticket because they were all correct!
As with 97% of all tax regulations, there are always exceptions, special circumstances, and specific items that get special treatment. Not surprising, the taxability of photographic services is no exception. Before moving on, let’s get a few things clear.
Without boring you with too many details, let us establish that, in the state of Louisiana, the sale or consumption of any tangible property (that is not specifically exempted, like food for home consumption) is subject to sales tax. Let us also say that the sale of any services (except those specifically listed, such as repairs to tangible property) is not subject to sales tax. So, most of the time, goods are taxable, but services are not.
Tangible property is that which is not permanently affixed to a building or other permanent structure. With the widespread use of computers, the tangible property definition has been expanded to include the delivery of this type of property in its digital/electronic form(ex: songs, books, movies, etc).
A final piece of guidance is to remember that the end user/consumer of the taxable property is the one who ultimately is responsible for paying the tax.
Armed with that knowledge, we are now ready to see how come everyone who gave advice to our photographer was correct, even though there were 3 different answers:
1. The photographer charges the customer a “sitting” or “session” fee. Customers don’t like any of the pictures, so they pay the fee and leave with nothing. No tax is collected in this case. Interesting to note is that if that customer returns at a later time and buys some of the pictures, the sitting fee becomes fully taxable.
2. The photographer sells frames and albums that are of very high quality. Any of those sales are fully taxable since they are sales of tangible property.
3. The photographer is contracted to take pictures and/or to video an event, like a graduation, wedding, etc. In these cases, because the customer will receive photographs, DVD, VHS, or digital files of the event, the cost of the entire engagement is considered taxable. Despite the fact that the photo paper, ink, or blank CD may only make up $100 of the $3500 “Deluxe Wedding Package,” the photographer’s $3400 worth of service provided becomes fully taxable.
Here's a little excerpt taken from LDR web site:
"The state general sales and use tax is levied on the following transactions:
The sale of tangible personal property in this state.
The use, consumption, distribution, or storage for use or consumption in this state of any tangible personal property.
The lease or rental within this state of any item or article of tangible personal property.
The sales of certain services as defined in Revised Statute 47:301(14). Those services are the furnishing of sleeping rooms by hotels; the sale of admissions to places of amusement and to athletic and recreational events, and the furnishing of privileges of access to amusement, entertainment, athletic, or recreational facilities; the furnishing of storage or parking privileges by auto hotels and parking lots; the furnishing of printing and over printing; the furnishing of laundry, cleaning, pressing, and dyeing services; the furnishing of cold storage space and the preparation of property for such storage; the furnishing of repairs to tangible personal property; and the furnishing of intrastate telecommunications services."
Some examples of these rules at work:
* An A/C company installs a 5-ton unit at your house. No tax. The unit becomes part of the building so it is not subject to sales tax.
* The same company installs a window unit for your garage. Taxable. The window unit is tangible property since it is not permanently affixed to the property.
* The company again(such a great company you've found) now comes and fixes the freezer in your garage. Taxable. Again, this is a repair on tangible property.
* You buy a song or book for your tablet or e-reader. Taxable. It is “tangible” property that has been delivered to you electronically.
* You get a tune up on your car. Taxable. This is a repair to a tangible product, and therefore, subject to sales tax.
* You get a haircut. Not taxable. You are not “tangible property,” so no tax is due on personal services.
* You get your taxes done and you get a paper and a digital copy of your return. Not taxable. Thankfully, they consider professional services non taxable. You copy of the return is a byproduct of the service provided. You're paying for the actual preparation of the return, which does not involve an exchange of tangible property.
* You buy a drink at the bar and pay $5. Believe it or not, that is a taxable event. It doesn't seem like it because you only pay $5, not $5.45. If you're in New Orleans, the true price of that drink is around $4.59 and the extra $.41 cents are for the tax that the bar must remit to the state and parish.
* Movie tickets, $10. Same as bar. Taxable. In fact, admissions to amusement parks, concerts, athletic events and other entertainment venues are taxable. Next time you look at your ticket stub, you may see the itemized listing of the ticket price that will show you the true cost of things.
* Dry cleaning. Taxable. This one is specifically listed as a taxable service above.
As you can see, there is somewhat of a method to the madness. The state does a nice job of summarizing it for us:
"All sales, use, consumption, distribution, storage for use or consumption, leases, and rentals of tangible personal property are taxable, unless an exemption or exclusion is provided by law for a particular transaction. In the case of service transactions, only the particular transactions enumerated in the law are taxable."
So, whether you're a business owner or a consumer, you now have a better understanding as to why you're being charged (or not) sales taxes.
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Category: Bookkeeping
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