Sales Tax - The American Society of Architectural Illustrators (ASAI)
|Do You Owe Sales Tax?|
|By Stephan Hoffpauir|
Some architectural illustrators believe that, because architectural services are not subject to sales tax in their states, they are not obliged to collect sales tax on their work. Others believe that sales of their work are exempt because what they provide constitutes a professional service rather than a product. They may be surprised to find that some states' tax authorities have very different opinions. Over the past few years at least four ASAI members in four different states have faced unexpected and heavy financial assessments for failing to collect sales tax on their work.
In the 1980’s, facing severe shortfalls in federal subsidies due to Reagan-era budget cuts, states were forced to levy sales tax on items and services which previously had not been taxed. While successful lobbying in some states meant that certain professional services such as architectural and legal services were exempt from sales tax, almost all states (with Alaska being a notable exception) now require businesses to collect sales tax on retail sales of what they term “tangible personal property” – physical items which are bought and sold. In a number of states, including California and New York, tax collection agencies have interpreted this to include such items as illustrations.
California differentiates between work done by licensed architects, which it exempts from sales tax, and that of architectural illustrators, which it does not. “Fees paid to licensed architects for their ability to design, conceive or communicate ideas, concepts, designs, and specifications are not subject to tax,” according to the state’s Board of Equalization. On the other hand it notes, “Architectural perspectivists do not act as ‘licensed architects.’ Architectural perspectivists are the retailers of renderings, prints and drawings they provide to architects or other consumers and tax applies to their entire charge for such items.”
While it is tempting to think of architectural illustration as a service analogous to architectural design, the more appropriate analogy may be to photography. Leaving aside digital imagery for the moment, architectural illustrations and photographs are similar in that traditionally they are images on paper and are, therefore, tangible in some agencies’ view. For example, the New York State Department of Taxation and Finance states that “artistic items such as sketches, paintings and photographs” constitute tangible personal property.
A number of state tax agency websites list items and services which are subject to sales tax, though these can often be vague when it comes to the sale of artwork. Arizona’s website is fairly clear, however. It specifically states that sales of artwork are subject to a “transaction privilege tax,” although it makes an exception for the sale of "commissioned artwork" defined as “a custom, one-of-a kind art creation made by the individual artist pursuant to the particular requirements of a specific purchaser.”
The sale of photography is taxed by many states. With some exemptions so is illustration produced by advertising agencies and graphic designers.
Some states tax not only tangible property, but certain types of labor and services as well. In Texas labor may be taxable if it is part of the price of goods sold, rented or leased. For example, manufacturing, assembling and fabricating are all examples of “taxable labor.” Texas considers artwork to be the product of such labor.
|Rules of Thumb|
|While laws governing sales tax vary greatly from state to state, certain provisions are common to many states. A business obliged to collect sales tax must register with its state’s tax collecting agency. It is then issued a license to collect the tax. Rates vary by state and can include city and county sales taxes collected on behalf of these localities by the state. Businesses are required to file sales tax returns either monthly, quarterly or yearly. Filings of returns are usually required even if no taxable transactions have occurred. A business that is dissolved or moves out of state is not normally required to continue collecting sales tax provided it formally notifies the state’s tax agency of the change in a proscribed way.|
|Sales Tax vs. Use Tax|
|Sales tax is levied on goods purchased within a state. Use tax is levied on goods purchased out of state. For example, if you make a taxable purchase in your home state, you will be charged sales tax. If, however, you purchase an item from a seller in another state and the item is shipped to you, you will likely not be charged sales tax. However, the sale of the item will likely be subject to your home state’s use tax.|
| Sales taxes are levied on a wide variety of goods and services, but most states have some exemptions. It is common for many states to exempt sales of food, clothing, prescription drugs and newspapers. Some states, though not all, exempt sales to religious and non-profit organizations. Certain types of businesses and commercial activities may also exempt, notably those related to agriculture and manufacturing. As mentioned before, some states such as California exempt architectural services. Others such as Connecticut imposed, but later repealed such taxes.|
In some states businesses can be exempted from collecting sales tax in certain specific instances. For example, some states, though not all, exempt sales to federal, state and local governments.
It is also common for states to exempt from sales tax items shipped overseas or to an out-of-state purchaser. (The purchaser may, however, be required to pay a use tax to his or her state.) If audited, an illustrator may be required to provide documentation that a drawing was indeed shipped out of state. Texas accepts “trip tickets, truck log records, freight forwarder’s receipts and airway, ocean and railroad bills of lading” as examples of such documentation.
Even if the item is shipped out of state, the illustrator may still be required to collect sales tax if the purchaser maintains an office in the state. For example, an illustrator in Los Angeles doing work for company X in Chicago will still be required to collect California sales tax because X maintains an office in San Francisco.
Perhaps the most common exemption applies to items sold for resale. When a business is licensed to collect sales tax, the state may issue a resale certificate. This allows the business to purchase retail items without paying sales tax provided the item is to be resold. For example, a graphic design firm may hire you to do an illustration for a brochure they are producing for a developer. If they then charge the developer for the cost of your illustration plus some markup, they may be considered to be reselling it. Some states will exempt you from having to collect sales tax in such instances provided the graphic design firm provides you appropriate documentation stating that your illustration is intended for resale.
In theory if an architectural firm hires you to do an illustration on behalf of a developer and then resells your illustration to the developer, the transaction might be considered exempt from sales tax. In practice, however, architects are often unfamiliar with the concept of resale and may not even have a resale certificate if they are not required by state law to collect sales tax. In these instances some ASAI members simply collect the sales tax regardless and remit it to the state.
When a business makes a tax-exempt sale, the state often requires that records be kept that sufficiently document the purchaser’s tax exemption. Some states such as Illinois have very specific guidelines regarding what such documentation must be. Colorado requires that sellers maintain signed affidavits from purchasers stating that sales of items are tax exempt. In the event of an audit the burden of proof is likely to be on the seller that a particular sale was tax exempt.
| The information contained in this article and the side article does not constitute legal advice. Tax laws differ in all fifty states. Some states require architectural illustrators to collect sales tax; some do not. The “Graphic Artists Guild Handbook: Pricing and Ethical Guidelines” advises, “If artists are doubtful about whether or not to collect sales tax, it is safest, of course, to collect it and remit it to the state sales tax bureau.” You should consult with a professional legal or tax adviser who is familiar with the sales tax laws in your particular state to determine your sales tax liability.|
The website www.taxsites.com/state.html provides links to all fifty states’ tax agency web-sites where more information can be found.