California State Sales Tax Question
I have a video production company in California, we shoot and edit weddings primarily. I've always charged state sales tax because years ago I was told that you're not just providing labor or a service for your clients, you're creating a finished product that you're giving them, therefore you must charge sales tax. It made sense and made it easy to explain to clients. And because I'd heard that an audit by the CA State Board of Equalization made the IRS seem nice, it wasn't the hill I wanted to die on. So for the last twenty-five years, unless the client was out of state or the job was resale, I've charged state sales tax.
I just had a prospective client ask if rather than providing them a finished DVD, I'd load the video online so they wouldn't have to pay state sales tax. Does this work? tx
Best place you can ask is the State sales tax office. They are the ones who will make the ultimate determination, so better get it from them. And when you get an answer, write down and save who you talked to, and the date.
There is no "way to peace." Peace is the way.
Ah, c'mon, Thomas. I don't want to be a wet blanket, but I think we all know the answer here (even with me being 3,000 miles away on the opposite coast). It's still a finished product and I'd bet you dollars to donuts that's the way ANY tax authority will interpret a different form of delivery. Your only alternative is to provide a service that another business entity turns into a finished product and, without reading CA's tax code, even that might not be enough to make what you do tax exempt. Sorry.
I'd sure look into it.
Here in Alabama, when we started our company 16 years ago we never charged any sales tax under the same assumption that we were providing a service, not a tangible product.
We were (and still are) mostly producing television commercials, but still were providing boatloads of Betacam dubs (time to gather the children around the rocking chair and explain what dubs were in the olden days). To help cover myself I made sure that all the printed tape labels had a tiny fine-print disclaimer line that read "This tape remains the property of Fantastic Plastic and must be returned upon request." That was my way of saying "We're not selling you this tape" even though we never wanted them back (strangely enough, one TV station many states away did ship us back several boxes of them once a year).
We were told many times by a competitor (who did charge sales tax) that we would get busted for this.
As luck would have it, we were audited... by city, county, and state, almost simultaneously.
We did get stuck for not paying a bit of sales tax on equipment items that we had purchased from out-of-state... but all three auditors agreed that we were providing a non-taxable service, not a tangible sales-taxable product.
Of course, you're on the opposite side of the country from us, so your mileage may vary. I'd certainly ask the proper authorities and/or your CPA about that.
At the very minimum, for those clients who do still want hard copies, it seems to me that you could only charge them sales tax on however much you charged for a disc (20 bucks?), as opposed to tax on the entire production... most of which is clearly a service and not a product.
Fantastic Plastic Entertainment, Inc.
Thank you for the input everyone. I asked a CPA and here's what she said:
I did some research and found that digital images are NOT subject to sales tax in California.
HOWEVER and this is VERY important - don't give them a CD or DVD with their pictures on it.
According to the state, "Your sale of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images is generally not taxable when you transmit the data to your customer over the Internet or by modem. However, if as part of the sale you provide your customer with a printed copy of the electronically transferred information or a backup data copy on a physical storage medium such as a CD-ROM, your entire sale is usually taxable."
Thank you. Do you think it's the same for video? It's still a digital file, so perhaps yes.
Yes, if it's loaded digitally - but no backup DVD
If you ever provide them with the DVD, then the entire sale is taxable
So, in 6 months, if they come back and need a DVD don't forget to charge them the sales tax!
Oh, now you raise another nuance. Do we need to tell them that we will not keep an archive? Or perhaps we can keep the archive copy but alert them that if they contact us to order a copy of it, we'll have to charge full sales tax on the entire job? Hmmm... what if someone else orders a copy of it?
If someone orders the archive, you charge them sales tax on the amount of sale for the DVD. You don't have to go back and charge sales tax on the entire job.
Your CPA's last statement was what I was alluding to in my previous post, and what I would expect to be true...
...that you can do/charge/bill for two different jobs... the production itself, and the disc copy of it. In that case you'd only charge sales tax on whatever you charge for the disc. I don't THINK you'd even have to wait the six months, six days, or six minutes... I'm not sure what the difference would be if you did it all at the same time. Just invoice them individually to make sure there is separation.
Just my guess...
Fantastic Plastic Entertainment, Inc.
Thanx, Thomas. Great info for California. I wonder if it applies the same way in other states, though. My CPA has told me that if it's a "product" it's taxable. The electronic transfer aspect may be one way of getting around this, but I'll have to ask. In our individual case, almost a moot point though as essentially everything we do is for out of state and international clients.
Personally I don't see the trend towards taxing things coming from the internet, be they physical objects or electronic files, slowing down too much. If there's money to be had states are going to find ways to get it.
Now perhaps you'll need to give out instructions on how to download a digital file and turn it into a DVD. Too complicated for most people, but an option for some.