What California Photographers Need To Know About The New Sales Tax Regulations.
by Jeff Sedlik, on behalf of the Advertising Photographers of America  
 
 

UPDATE,  JUNE 2006

At the request of the State Board of Equalization (BOE), APA consulted with the the BOE's Business Taxes Committee (BTC) members during a four year period to assist the BTC in better understanding the workflow and licensing practices of professional photographers. APA  brought numerous issues to the attention of the BOE toward the reform of the application of sales tax to transactions between professional photographers and their clients, and achieved significant gains for photographers. APA also brought the matter to the attention of the legal staff of the American Association of Advertising Agencies, and AAAA joined with APA in discussions with the BTC. While the APA's input will be reflected in a new BOE sales tax guide for photographers, ultimately the BOE did not agree to make all edits requested by the BOE, and the APA does not agree with or endorse all information presented in the guide.

Photographers and their accountants should note that regulation 1528 and the BOE's past publications for photographers no longer apply to commercial photographers. Commercial photographers should refer to regulation 1540.   Also note that APA recommends against acting on advice received from the BOE via telephone, as many BOE representatives (especially those in regional offices) are not fully aware of the new regulations affecting photographers. APA recommends that you instead write the BOE and make a formal inquiry as instructed below. 

After several years of effort in chairing the APA's tax force and after completing a two year term as APA's national president, photographer Jeff Sedlik is now the President and CEO of the non-profit PLUS Coalition, http://www.useplus.org, charged with creating international standards designed to simplify and facilitate image licensing. Paul Antico of APA/Los Angeles now chairs the APA's Tax Force and is the APA's point person in communications with the BOE on behalf of photographers. Questions regarding California sales tax may be posted to APA's free forum for discussion of business issues affecting photographers, APAnet.

Consult with your CPA before relying on any advice here. As not all CPAs are familiar with the BOE's interpretation of regulation 1540, make sure that your CPA makes a written inquiry with BOE on your behalf.

(if you have previously registered, no need to re-register)

 

UPDATE, SEPTEMBER, 2004

APA is actively engaged in discussions with the State Board of Equalization (BOE) to create a sales tax FAQ and decision tree for photographers. APA is also pursuing additional sales tax regulation reform.

 
UPDATE, SEPTEMBER 10, 2004

APA continues in its dialogue with the California State Board of Equalization, Business Taxes Committee.

Photographs are intellectual property, and Photographers own “copyright interests” in their photographs. Photographers’ licenses to clients are considered transfers of “copyright interests.” A transfer of a copyright interest via a written agreement allowing the copying and selling of the copyrighted property is a “Technology Transfer Agreement” (TTA”) under Taxation Code 6011 and 6012, and the State Board of Equalization’s regulation 1507. In a TTA, the license fee (the transfer of copyright interest) is NOT taxable, but the expenses are taxable. 

The state cannot tax the license portion of a TTA transaction,  but they are now making every attempt to do so. For example, when a photographer invoices a client a lump sum (fees and expenses not separately itemized)  on an invoice for a job that qualifies as a TTA, the Board says that if there are not any previous transactions that can be referenced to determine a reference point for an appropriate fee for that license, then sales tax applies to 200% of the photographer’s actual expenses. This requirement can and does result in the state collecting far greater than 8.25% sales tax on photographers’ transactions.

Example:

Amount billed by photographer to client for a TTA:
$5000 (lump sum, no fees/expenses itemized)

In this example, the photographer’s actual expenses were:
$3000

Sales tax applies to 200% of the photographer’s actual expenses:
Taxable amount: $3000 expenses x 200% = $6000 tax basis

$6000 tax basis x 8.25% tax rate = $495

In the above example, $495 in applicable tax amounts to nearly 10% of the $5000 billed by the photographer to the client. This is an example of the efforts of the State Board to regain the tax dollars lost as the result of the Heather Preston decision. Under the current regulations, the amount of sales tax due could easily exceed a photographer’s fee on a transaction, where the expenses such as models, travel, crew, sets, rentals, etc can cause the expense total to significantly exceed the fee. Example: in a transaction where a clients’ license involves minimal reproduction rights and the fee is $2500, but the expenses are $16,000, the tax basis is $32000 (200% of the expenses) and the sales tax is $2640 (8.25% of $32000). Even though the total transaction was just $18,250. That amounts to 14.5% sales tax.

Another very difficult and confusing topic is “preliminary art.”  Preliminary art is activity dedicated to conveying ideas, concepts, looks or messages to a client for review and acceptance. Preliminary Art is not taxable. Therefore, a photographer’s time and expenses dedicated to “Preliminary Art” are not taxable under the law. But, at what point does a photographer draw the line – at the night before the shoot? Or at the moment that the client approves a Polaroid or digital image prior to commencing with capturing the hero shots?  How can a photographer accurately allocate fees and expenses to “Preliminary Art” (taxable) vs. “Final Art” (may or may not be taxable)?  To make matters even more confusing, in instances where a photographer invoices a lump sum, the Board requires that the photographer arbitrarily use a ratio of 75/25 to determine which portion of the invoice was final art vs. preliminary art.

In the process of attempting to regain lost sales tax revenue, the Board has made the sales tax guidelines for photographers extremely convoluted and virtually impossible to understand, much less to comply with. At this point, neither a CPA, nor an attorney, nor even a local State Board of Equalization representative could confidently advise a photographer as to how to apply sales tax to a licensing transaction.

APA has been working with the State Board over the last several years to help them to better understand photographers’ transactions, and to clarify and simplify the application of sales tax to those transactions. APA is now working with the State Board on a pamphlet explaining sales tax for photographers. In the process we have identified what we believe to be inconsistencies in the Board’s policies, based on incorrect assumptions made by the Board regarding photographer’s transactions. We are currently involved in a dialogue with the State Board in an attempt to resolve these issues. The Board’s staff are cordial and cooperative in these discussions, and very willing to listen, but the reality is that they will use every legal means possible to maximize the sales tax collected by the State. It is our goal to ensure that the Board understands that photographers’ transactions are licenses, and that the State must revise its policies so as to fully comply with the Preston decision. Based on my observations, I believe that elimination of sales tax on photographer’s licensing transactions will not be achieved until a photographer challenges the State Board and takes that challenge up through the courts, just as Heather Preston has done. 

I am recommending that all photographers who have not yet done so transition from listing “creative fees,” “photographer’s fees,” “day rates,” or other descriptions of fees, and simply state one type of fee: “Licensing Fee.”  This most accurately describes the transaction between a photographer and client. The photographer’s time and labor all culminate in the license, which is transferred in all transactions by all photographers, whether they realize it or not. Clients may refer to day rates or other types of photographer’s fees, but photographers should refer to their fees as “licensing fees.” This can be applied to B2B (Advertising, Corporate, and Editorial) photography transactions, and even to B2C transactions such as wedding and portrait photography. In B2C transactions, when you strip common misconceptions away, what is left is the license – the photographer owns the copyright, and in addition to selling prints, the photographer is licensing the client the right to personal use of the photographs. I expect that we will eventually succeed in eliminating sales tax on licenses. Photographers who accurately refer to their transactions as “licenses” will be one step ahead. There are even more significant advantages to doing so. To learn more, see http://www.apanational.org/value/ 

Here are some sales tax basics. Before you read on, I will advise you that sales tax is extremely complex and that the actual circumstances of your transaction may result in the transaction being taxable under the law. So DO NOT rely on the below without first receiving confirmation from your CPA and the State Board.

  • When you deliver a job to an out-of-state location, the entire transaction is not taxable in California, and you should indicate a $0.00 sales tax amount and/or indicate “non-taxable – delivered out of state” or a similar notation on your invoice. However, in most states, the client must then pay “use tax” on the transaction in their home state. But that is not your problem. Just make sure that you retain a paper trail evidencing the shipment of the photographs.
  • If you work with a client that is based outside of California, but you deliver the job in tangible form (prints, proofs, film, etc) within the state (such as handing photographs to your client at a studio in California or messengering a package to their hotel in California) the entire transaction may be taxable unless it qualifies as a Technology Transfer Agreement. The out-of-state delivery exemption only applies when the photographs are actually delivered to an out of state location, and does not apply to deliveries/hand-offs made in state, even where clients are visiting from out of state.
  • When you deliver a job electronically, either by email, FTP, web upload/download or other electronic delivery, the transaction is not taxable, provided that nothing tangible changes hands. This means that an electronic delivery accompanied or followed by delivery of a color proof would be taxable.

Again, do not rely on any of the above in your transactions. Use the above information as a starting point for your discussions with your CPA and your State Board of Equalization representative. Send a written “request for determination” to the State Board of Equalization, get your response in writing, and then base your business policies on that response.

Meanwhile I am chairing an APA “Tax Force” composed of representatives of APA National and APA’s California chapters (SF/LA/SD) in ongoing discussions with the Board of Equalization, in anticipation of clarifying and simplifying sales tax on photographers’ transactions. 

Any questions on sales tax should be directed to the State Board of Equalization in Sacramento. I am a working photographer and APA volunteer, and as such cannot dedicate time to responding to questions from individuals. The  APA will be distributing an FAQ and decision tree on sales tax after the BOE addresses our remaining questions.

As a parting note, photographers should be aware that they must pay “Use Tax” of 8.25% on any out-of-state purchases, whether for private or business use. For example if you buy computer or camera equipment from a New York vendor via mail or web order and do not pay sales tax, you must then declare that purchase on your sales tax return, and forward 8.25% use tax to the BOE. If you fail to do so, there are fines, penalties and interest, as well as back taxes. When you are audited by the BOE (and you will be audited, eventually), they will examine your INCOME tax returns and require that you substantiate the sales tax paid on any asset purchases listed there.

Have Fun.

Jeff Sedlik
Chief Advisor on Licensing & Copyright, APA National
Past President, APA National

More info:

Review of major changes in the photographer’s sales tax regulations:
http://www.boe.ca.gov/news/pdf/regulation1540.pdf

The sales tax regulation 1540 applying to photographers:
http://www.boe.ca.gov/pdf/reg1540.pdf

The Audit Manual used by the BOE when auditing photographers:
 http://www.boe.ca.gov/pdf/fam-11.pdf 
The VERY important sections are: (1) The intro, entitled "General" and  (2) Section 1103 "How Tax Applies to Ad Agencies and Commercial Artists" with special attention to the sections on technology transfer agreements and conceptual services. I assisted the BOE with writing the sections on photographers’ businesses and workflow, but do not agree with their determinations regarding application of sales tax.

 The BOE regulation describing Technology Transfer Agreements (1507)
http://www.boe.ca.gov/pdf/reg1507.pdf

Information on the Heather Preston Supreme Court decision
 http://www.gag.org/res/pdfs/Cal_BOE/BOE_FAQ.pdf

 

UPDATE, JULY 2002

While we wait for the State Board of Equalization (BOE) to finish their final legal review and make the regulatory changes final sometime in August, the APA is continuing a dialogue with the BOE on behalf of photographers, and participating (along with GAG and other organizations) in the review of the BOE Audit Manual, which will be used by sales tax auditors as a guide to interpreting the changes to the regulations.  

UPDATE, APRIL 2002

The California State Board of Equalization (BOE) has voted to approve dramatic reforms in the sales tax regulations affecting photographers. Details in the February 2002 Update below.  The revisions to the regulations are now under review by the BOE's legal department to ensure compliance with existing laws. Final revised regulations should be distributed in August, 2002, after approval by the BOE legal department. The changes will apply retroactively and you could legally change your sales tax billing procedures now. However, until the final regulations are published, the APA advises that you either maintain your current sales tax billing procedures, or contact your tax specialist or better yet, the Board of Equalization for a written response. Verbal responses over the phone and responses made to inquiries by the APA or other photographers will not protect you in an audit situation. Send your questions directly to the BOE in a formal written inquiry. This is referred to as a "6596 inquiry," referring to the regulation which specifies the necessity for a written response addressed directly to you, in your name. Send your 6596 inquiry to: 

Audit Evaluation and Planning MIC40
State Board of Equalization
PO Box 942879
Sacramento, CA 94279-0040

Please read the update below, for more important information...

UPDATE, FEBRUARY 2002

Well, we did it.  The trade organizations representing photographers and artists statewide banded together and successfully convinced the State Board of Equalization to revise its interpretation of sales tax regulations affecting commercial artists.  So what part did the APA play in this effort?

  1. The APA contacted every voting member of the State Board of Equalization and provided them with a more informed perspective on the nature of commercial photography.
  2. The APA contacted the State Board of Equalization senior staff responsible for drafting the regulations and manuals which determine how auditors will enforce the regulations affecting photographers. We pointed out the inconsistencies in the State Board's treatment of photographers vs. illustrators, and other unfair and possibly illegal interpretations of sales tax regulations using real world examples. We encouraged staff to draft changes and to make recommendations to the voting members of the Board.
  3. With the help of the Workbook, the APA broadcast emails to every photographer in the state informing them of our efforts, and orchestrated a letter writing campaign encouraging photographers to submit samples of their work to the Board.
  4. APA National President Jeff Sedlik established a web page dedicated to providing photographers with information about the sales tax reform effort, and posted excerpts from his dialogue with the State Board.
  5. We held APA meetings in Los Angeles and San Francisco dedicated to discussion of sales tax reform, with some meetings attended by representatives from the State Board of Equalization, who listened to the concerns of our members.
  6. Each APA chapter in California contributed financially to the legal costs of defending illustrator Heather Preston in a sales tax case before the state supreme court which was instrumental in setting the foundation for the decision of the State Board of Equalization.
  7. The APA joined forces with other photographic trade organizations including EP (Editorial Photographers) and ASMP (American Society of Media Photographers).
  8. The APA contacted our clients' trade organization, the AAAA (Association of American Advertising Agencies), and discussed a cooperative effort towards mutually beneficial sales tax reform.
  9. The APA registered as an Interested Party with the State Board of Equalization and participated in the reform effort every step of the way.
  10. APA leaders attended hearings and conferences in Los Angeles and Sacramento. APA National President Jeff Sedlik and past San Francisco chapter Chairman Charles Cormany spoke before the State Board at a hearing in Sacramento.  Representatives from the State Board commented on the large and vocal presence of photography industry leaders at these hearings.
  11. Attorney Christine Valada was retained cooperatively by APA and ASMP to review the case, attend hearings, and work with the organizations to revise and draft language for the sales tax reform effort. APA's CPA Harold Nelson was consulted and attended board hearings.

The above list represents a grass roots effort by the APA to achieve sales tax reform for California photographers.  But the APA was only one of many organizations addressing this matter, including EP and ASMP, and others.  Most notably, the Graphic Artists Guild played a huge role in the effort, dedicating seven years to achieving the reforms on behalf of illustrators. Some time ago, APA President Jeff Sedlik approached GAG and suggested that GAG and APA  work together in the effort. GAG worked with the APA and graciously agreed to include language addressing photographers' concerns in their recommendations to the State Board.  It is a certainty that the huge gains made for photographers could not have been made as expeditiously without GAG's significant support and leadership. 

So, what did the State Board decide? The State Board members voted to clarify the regulations and to reclassify photographers who work in the advertising and publishing fields. As a result there are a host of benefits to photographers, the most major being:

  1. No sales tax on licenses of reproduction rights. Previously, the board considered photographers' licenses fully taxable.
  2. No sales tax on artwork delivered on a computer disk, if the disk is returned. Previously, artwork was taxable unless delivered electronically.
  3. Photographers working in the advertising and publishing fields are now afforded all of the benefits under sales tax law previously provided only to "graphic artists."  Previously, the board position was that photographers did not participate in the creative process, and that photographers' licenses were fully taxable at the full retail rate, while graphic artists' licenses were only partially taxable.  

This is a clear victory for photographers, affecting every invoice for every commercial photographer in the state, from this point forward.

When do these revisions take effect and how should photographers adjust their invoices?  We recommend that you consult with your CPA and/or send a request for a written determination by the State Board of Equalization prior to adjusting your accounting practices. We've done our best to provide factual information, but this information will be useless in a sales tax audit. So please contact your CPA and determine how these changes affect your business. 

The revisions to regulations 1540, 1541, and 1543 will be posted in a few
months at http://www.boe.ca.gov/sutax/staxregs.htm

To contact the State Board of Equalization for a written determination:

State Board of Equalization
Attn: Janice Thurston, Assistant Chief Counsel (MIC 82)
P.O. Box 942879
Sacramento, CA  94279-0082

Many thanks to all of the APA volunteers and members who contributed to this effort, and to all of the other organizations who each played a vital role in achieving this great victory for photographers.

 


UPDATE, AUGUST 2, 2001
Representatives from the APA chapters of Los Angeles, San Diego, and San Francisco will be speaking before the State Board of Equalization in August, to help the Board to better understand the business of advertising photography. We will attempt to convince the Board to revise their regulations to reflect the ruling in the Preston case (see below) and to eliminate sales tax on Photographers' fees. We are very close to success on this effort.

 

UPDATE, APRIL 2, 2001
 The hard work of the Graphic Artists Guild today resulted in in a landmark supreme court decision which will significantly reduce or eliminate sales tax on copyright licensing transactions for all California photographers. See below for a copy of the press release from the Graphic Artists Guild.

 Click here to view the Graphic Artists Guild press release

Click here to view the Supreme Court decision in the Preston case

This news significantly alters the landscape for photographers regarding copyright and sale tax. Stay tuned.

Below you will find information compiled prior to the Supreme Court ruling.


RECEIVE UPDATES ON THE CHANGES IN SALES TAX REGULATIONS AFFECTING PHOTOGRAPHERS
As you will see on this web page, the APA has been working to reform the unfair sales tax regulations affecting photographers in the State of California. If you would like to receive future updates on the APA's progress in changing these regulations, please enter your name and email address below. In addition to updates on this issue, we will also send you the APA's Sales Tax Tips For California Photographers.

   
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Profession:      What is your California County?  

The APA's efforts to reform California Sales Tax regulations are intended to benefit all California Photographers statewide, APA members and non-members alike. However, if you'd like information about the APA, I'll arrange for a local chapter to send you that information. Let me know below whether you would like to receive information about APA, or not. This won't put you on any APA email lists. I promise. 

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Visit the APA website at http://www.apanational.org
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