Charge Sales Tax on Visualization Services?

[chapmandu]

Hi all,

 

We have an auditor from the State of Wisconsin (U.S.) trying to tell us that we should be charging sales tax on our visualization services.

 

Does anyone out there (particularly in the U.S., and in a perfect world - in the State of Wisconsin) have any experience with this.

 

This seems like an odd request to us.

 

Thanks in advance.

 

Jon

[louis.cho]

I don't know law of Wisconsin but here, Visualisation and other graphic design is like other services and there is taxes on products and services.

[ikinman]

Whether or not visualization artists should charge sales tax is a complex issue, and it does vary from state to state. One hard and fast rule, however, is that if you ask an auditor from the state tax authorities whether or not you should collect sales tax, they will always give you the same answer - absolutely.

 

It's important to remember that you are not 'paying' the sales tax, but are instead essentially acting as the state's agent and collecting it for them.

 

Most states base sales tax laws on whether or not what you are selling is 'tangible.' And that's where the fun begins, because in the digital age what is tangible? All states obviously view the answer to that question in their favor, however.

 

In short, the best advice is to collect the sales tax based on what the state laws require. (You'll need to talk to the auditor to get the specifics of your state). Many artists get away with not doing it, but that approach is really more of a financial Russian Roulette - you can get away from it for years, but then you may get socked with thousands or tens of thousands of dollars in tax bills (it's happened before). Again, you are not paying the tax out of your profits, you are merely charging the clients the tax and passing it on to the state. One thing you must do is keep meticulous records (a necessary thing in any case)

 

Many artists don't do this as they are worried it will cause their prices to appear go up, making one less competitive with no upside gain. In practice, talking with many artists about this very issue, I have not found this to be the case. If a client balks, the answer is simple - get them to to provide a tax-exempt certificate. We don't scream when a restaurant charges sales tax.

 

There is more information on this topic at the NYSR website, including discussions with lawyers and state officials, necessary forms, etc, though one must be a member to access it. Hey, it pays to be a member....

 

I hope this helps.

 

-Ian

[chapmandu]

Whether or not visualization artists should charge sales tax is a complex issue, and it does vary from state to state. One hard and fast rule, however, is that if you ask an auditor from the state tax authorities whether or not you should collect sales tax, they will always give you the same answer - absolutely.

 

This is kind of what I suspected.

 

Most states base sales tax laws on whether or not what you are selling is 'tangible.' And that's where the fun begins, because in the digital age what is tangible? All states obviously view the answer to that question in their favor, however.

 

OK. Tangible as defined on dictionary.com is 1. capable of being touched; discernible by the touch; material or substantial. If we are talking about animation, you obvisouly can't "touch" it, but many times the animation is delivered via CD or DVD, which you can obviously touch. I wonder if this is where the confusion comes in. In the case of renderings, when a print is delivered, now there is something you can touch, but at the same time, the paper is the "delivery device" not the actual deliverable, which is of course the image.

 

In short, the best advice is to collect the sales tax based on what the state laws require. (You'll need to talk to the auditor to get the specifics of your state).

 

It looks like I will get a chance to talk to the auditor personally a little later today. We'll see how it goes. I will post any meaningful results.

 

Thanks Ian,

 

Jon

[ronll]

It definitely varies state to state so you will have to get your state's specific advice. In the state of Washington, we definitely do NOT collect or pay sales tax on the rendering "service". We are required however, to pay it on prints of those renderings. This is on the amount we actually charge the client for the hardcopy, again NOT including the rendering service. As a result, I will very seldom sell prints of my renderings but rather suggest that the client contact a good printing service and I will provide the efiles. On the other hand, I do offer my clients small prints of their renderings as "instruments of service" but I do not charge for those.

[Sawyer]

I asked around and basically what I was told for CA was that if you hand in a print you need to charge tax for the whole image. But a CD, ftp transfer, email are not taxable. Like Ron I don't offer prints.

 

This is not legal advice and you should ask a local tax representative.

[chapmandu]

I asked around and basically what I was told for CA was that if you hand in a print you need to charge tax for the whole image. But a CD, ftp transfer, email are not taxable. Like Ron I don't offer prints.

 

This is not legal advice and you should ask a local tax representative.

 

So, in your case, if you were offereing a print of your image to your client, then you would charge sales tax not only on the print itself, but also on the creation of the image?

[chiquito]

Im not in the US, so I can say this.

I was with the same issue, so I hired an accountant who is an expert in taxation, from where I was we figured out what was the best way to inscribe my buisness in terms of tax (I had a gap in a non specific category).

I ended up paying just a percentage of the savings I make on a year to this guy, everything legal and legit. Just being advised by someone that knows what to do and how to do it.

Perhaps theres a difference on hoy you incribe yourself, or you can have a legal adress in one point and a working adress in another... check it out.

[ronll]

I would like to reinforce what Ian said above about asking someone at the State. They will usually tell you that you DO have to pay tax, even tho it may not be true. This happened to me many years ago. I don't think they are being dishonest, they just don't take the time to really understand what we do and they tend to err on the side of more revenue. You really need to talk to someone with an opposing view, like a good accountant or tax attorney. But remember, we are not selling a "picture", we are selling a "service" wherein the picture is an instrument of service. Just like an architect sells a service, not the blueprints.

[chapmandu]

I would like to reinforce what Ian said above about asking someone at the State. They will usually tell you that you DO have to pay tax, even tho it may not be true. This happened to me many years ago. I don't think they are being dishonest, they just don't take the time to really understand what we do and they tend to err on the side of more revenue. You really need to talk to someone with an opposing view, like a good accountant or tax attorney. But remember, we are not selling a "picture", we are selling a "service" wherein the picture is an instrument of service. Just like an architect sells a service, not the blueprints.

 

Thanks ron ll - this sounds like good advice.

[John Dollus]

http://www.cgarchitect.com/vb/11046-llc-not-llc.html

 

from Ernest's post on page 1:

 

>>>>By the way, whether or not you form a corporation, you do know that you are required to collect sales tax on most rendering jobs for the lovely State of New York? You must be a registered sales tax vendor and collect the money for the state and pay it to them. Or they will bury you. If you need to know more about this I urge you to join the NYSR (New York Society of Renderers). We did extensive work on sales tax for our industry about 10 years ago. Or call me. This is very important. This applies in almost if not all states in the US. It's not just NY. Remember, most of the other states follow the leads of NY and CA. I know one renderer in Missouri who ended up with a sales tax bill of over $40,000, and that was many years ago. If you don't get it from the client the state will expect you to pay it out of your own pocket.

[chiquito]

Would a thread on this particular topic be a good idea?

[chapmandu]

My meeting with the auditor has been postponed to tommorrow.

 

In the mean time, I called a friend of mine who operates his own visualization business (up closer to Green Bay, but still in Wisconsin). He indicates that when he opened up his busienss years ago, he did research and discovered that there is a grey area here regarding whether or not this service is taxable. So, to be safe, he charges sales tax on all of his services / projects, with a few exceptions being tax exempt projects (which his clients then provide him with the proper documentation), or the occassional architect who flat out refuses to pay the sales tax.

 

I really don't like the fact that we have this grey area. I'd much rather be able to say with certainty that it either is or is not taxable. It sounds like the NYSR was successful in nailing down there state government and getting a definitive answer.

 

Ian, it sounds like you are intimate with the level of effort that was required to do this in NY. Can you comment on that at all?

[Ernest Burden III]

I really don't like the fact that we have this grey area. I'd much rather be able to say with certainty that it either is or is not taxable. It sounds like the NYSR was successful in nailing down there state government and getting a definitive answer.

 

Ian, it sounds like you are intimate with the level of effort that was required to do this in NY. Can you comment on that at all?

 

The NYSR used the fact that there was a 'gray area' as the focus of our work with NY State. We went to them and said 'we want to obey the law but we don't have rules that make sense to us and especially to our clients, who usually refuse to believe that they must pay sales tax on renderings'. We worked out a set of rules, and more importantly, got a promise that applying the rules would be PROspective, meaning forward-looking. We got ourselves out from being at-risk for the sins of the past, so long as we all registered as vendors right away and followed the new rules.

 

There are still some gray areas regarding digital work, but I resolve it by billing the sales sax as a default. My standard agreement lists a proposed project fee "plus any applicable sales tax". Clients sometimes don't play along, but I've done my part according to those rules we negotiated with NY State.

 

You said 'we'. Is that a company?

 

So far I've described what the NYSR did, and some things I learned in the process. I was in charge of that project, so am pretty familiar with the subject. Now, to your situation:

 

I am not a lawyer and am not giving you legal advice. Speaking of which, you should think about finding a lawyer, a good lawyer. Because once a state agency turns their attention to you, it can get ugly.

 

You need to find out what your state has for rules and laws, and it makes sense to ask an auditor to back up their claim with what they are basing them on. For example, in NY there was a big gray area, but there was also a court case where an architectural renderer was hit with a sales tax bill and fought it in court...and lost. He had already made any argument we were likely to come up with, and it didn't work.

 

Has the auditor already determined that you owe back sales tax or is it just something he's looking into? If its already entered, your options shrink. If an assessment is not in place yet, you might still avoid it by reading the statutes and rulings in your state and find a plausible argument that your work doesn't fit the statues. And don't count on that working, for the reasons Ian Kinman mentioned.

 

If you are assessed:

 

Find out what the statute of limitations is, fight any suggestion that your failure to collect the tax was 'willful'. Watch out for that word--willful, it'll sink you. Make sure you are not assessed for anything beyond the time limits of the laws.

 

Re-invoice your clients on all invoices the state flags (and challenge any that may be beyond their rules) for the additional cost of the sales tax. This is not easy, but neither is paying it yourself.

 

Make an"Offer For Compromise". This is where you offer a lower amount to settle a tax bill. The IRS has them, and so do most states. They often will not admit it. My accountant knows someone who went to a NY State tax office to ask for the form, and was told it didn't exist at the state level. He said he'd wait and sat in the guys office for several hours until the form was finally handed to him.

 

There's a lot more to this subject, but I've got to get back to work. Good luck tomorrow.

[ikinman]

Ernest is the one to really talk about it, as the NYSR effort several years ago was done under his effort, not mine. I saw him earlier today and mentioned this thread, so hopefully he will be posting soon on it (if not while I write this).

 

The main issue was to eliminate the 'grey area' that you mention, and get everyone on the same page with this - state and visualization artists and companies. Yes, there is a big grey area for this in most states, but in the end you don't get to negotiate with the state on this - that would be like playing chicken with a car when you're on a skateboard.

 

So NYSR sat down with the state and cleared up the confusion, including asking for specific questions to be answered in writing (which sets a type of judicial precedent) that would apply to the state of New York. Now this won't immediately apply to Wisconsin, but NY and CA law pretty much runs the table as far as most states in the US (save for Louisiana and their funky French common law) so you can, with a lawyers help, use this as a guide that your state auditor will pay attention to.

 

The document is only available at the NYSR website to members, but, as president, I've decided to post a copy that you (and anyone) can download at this address:

 

http://www.animation.to/CGArchitect/08i1-STGuide.pdf

 

Now before you get excited, you must remember one thing: if the state's already knocking at your door, then pretty much anything you do now is bolting the barn doors after the horse has escaped. If the state is telling you that you owe sales tax that you should have been collecting, then get off of these boards and get on the phone to a lawyer.

 

If this meeting with the auditor is to find out about general issues, then this guide will be a help to you, and to those who are reading about this and worrying if it can happen to them. Some basic issues:

 

1) Playing the 'it's not tangible' card with the state is a fool's game. The state decides what's tangible, not a dictionary. And always remember that despite how anyone may feel about the IRS, the federal tax authorities are cute fuzzy kittens compared to any state tax authority. NO EXCEPTION. They are brutal, and shouldn't be messed with.

 

2) You are not being taxed, but are instead responsible for collecting the tax. This means that when you start your company, register with the state. Don't 'bury' the tax, but add it to the end of your bill. If your client doesn't want to pay it (who does) then get them to send you a copy of whatever tax-exempt certificate the state has.

 

3) One thing that NYSR was able to get the state of NY to agree to in writing is that if a client should be paying the sales tax (ie they are not exempt) but refuses to pay for it, then ultimately it is the responsibility of the state to collect the tax from the client, not from the renderer. Yipeee! But bear in mind that for this to work, you must already be registered and be collecting sales tax from your clients. This doesn't work if you haven't been collecting sales tax until the state knocks on your door.

 

4) Sales tax, like payroll tax, is a special fun tax in that it transcends corporate liability and bankruptcy. So if you have a corporation and get slammed for the sales tax, too bad - you are PERSONALLY liable for it. If you then file for personal bankruptcy, too bad - you remain PERSONALLY liable for it. The only thing that supersedes it is death.

 

So, to wrap up - if the state is beating down your door - get legal help immediately. If the state isn't beating down your door, do something now to make certain that it doesn't happen. Ignore this situation at your own peril.

 

-Ian

[Chad Warner]

It seems like there is a lot of confusion as to whether or not people/companies should be collecting sales tax. I know we're not, but now I'm starting to wonder if we should be.

 

I'd like to hear from other people who have experience with this.

[chapmandu]

Ian and Ernest,

 

Thank you very much for all of this information.

 

We are a corporation. Our core services are civil engineering and surveying, but we offer visualization services as well.

 

We are audited regularly by the state as we do a lot of work for the state, primarily the Department of Transportation. So, seeing an auditer in here is not uncommon. They have been reviewing our records yearly for much longer then I've been here (nearly 10 years). The visualization issue is one in which this particular auditer flagged as an issue that has to be discussed. Why this has not been brought up before is an interesting question, but none the less.

 

I sincerely appreciate you posting the document. I've skimmed over it already and have provided a copy to one of our accounting staff for reference. It most certainly provides a good example of what NY's stance on the matter is.

 

Congratulations to you and your fellow committee members for taking the initiative to get this done, and in writing. I am not aware of a similar document for the State of Wisconsin, but we certainly will be inquiring about it when we meet with the auditer tomorrow.

 

Thanks again,

 

Jon

[ikinman]

My two cents would be that if you are a corporation where rendering is a minority of what you do, then your best bet is to do for renderings whatever you do for engineering and surveying. If you're charging sales tax for your main work, then you're set up to charge for rendering work as well. And if you're not collecting sales tax for that engineering/surveying work - and you're getting regular auditor visits and all seems cool, then you should be good. What's probably going to be a problem is if you claim that rendering work as a service is somehow different and tax-exempt as opposed to your main work. The state will probably disagree.

 

On a broader note, the biggest issues for the readers of this thread is those who have companies already but aren't collecting sales tax, but think, damn, I better look into seeing if I should start doing so. There is obviously a major potential problem with that, namely that going to the state and getting everything in order to do so is akin to admitting that you haven't been doing it so far, so you are pretty much going to get slammed for actually doing the right thing. And as I mentioned above, state tax agencies are among the worst nightmares any company can face.

 

So, what to do? First of all, talk to your accountant and/or lawyer. My guess is also that there are freelancers out there who don't know or yet have a good accountant or lawyer. In that case, there is another piece of advice I can give:

 

In your entire life you will need only three people to survive: An understanding spouse, an excellent accountant, and an excellent attorney. And not in that order.

 

Second is to glean some meaning from this: You don't have that problem if you are a NEW business and approach the state as one.

 

I don't want my posts in this thread to sound too apocalyptic - you need to discern what your situation is and act accordingly. But do some simple math and see what would happen if you are assessed for your state's sales tax on the last three years of visualization income. That could add up.

[Ernest Burden III]

It seems like there is a lot of confusion as to whether or not people/companies should be collecting sales tax.

 

Where is the confusion coming from? The states are not confused. Every time one of us gathers the nerve to go ask them about it, they say the same thing.

 

In your entire life you will need only three people to survive: An understanding spouse, an excellent accountant, and an excellent attorney. And not in that order.

 

I'm going to go with:

accountant

understanding spouse

and a distant third -- lawyer, which just edges out the priest you see loitering around the foot of your hospital bed.

 

If a company's primary business is engineering, there may be a valid argument that visualization is a part of that professional, licensed practice. Usually the only businesses that have some built-in sales-tax exemptions are those that states license--doctor, lawyer, accountant...understanding spouse. Even that doesn't cover it. In New York, where the practice of architecture is generally exempt, there was a ruling that it was NOT exempt when the architect was doing primarily interior work, meaning more decorating than designing room layouts. That gets gray, too. I know a few renderers in NY who are licensed architects and decided that they didn't need to worry about sales tax on their rendering work. OK. Maybe. But what about when they render an interior? What then? I don't know, and as far as I know that has not been tested.

 

NY also leans heavily on the phrase "tangible personal property". It's probably in that document Ian posted (I haven't read in recently). That was defined by the state as anything that can be touched. And it only takes a single sheet of paper (maybe a WIP printout you give the client) or a CD handed over to make the entire invoice taxable. No problem, I just email the client a download link for the files. I'm fine, right? Well, no. NY looks at the licensing involved, too. If you are giving a client open-ended usage rights you are granting them a license, even if you keep the copyright. That may not be 'tangible' but it is taxable. For example a logo design is always taxable because the customer is getting open-ended usage.

 

No problem, the client sent me their resale number. Actually, problem. Again, in New York, that's not enough because the transaction still must meet certain requirements. Therefore the client really needs to give you an Exempt Use Certificate, a general resale number really isn't enough. Now, on the otherside, I can use an Exempt Use Certificate to not pay sales tax on things that I use primarily to produce products that are usually taxable. So if I'm buying computers, large, expensive printers, that sort of thing, I can avoid paying sales tax even though I'm not going to be re-selling these items. So it works both ways.

 

Because the New York Society of Renderers did so much work on this issue, it could be used as a model if anyone wants to approach their states to discuss the sales tax issues for rendering work. There was also some work done on the issue by the ASAI (primarily the efforts of Frank Costantino in Massachusetts and Robert Becker in California). Yes, it's state-by-state, but its true that what NY and CA do is going to be influential in the rest of the US if states need to address these questions.

[aaron-cds]

Is there anyone from Illinois who can chime in on this interesting thread?

[Chad Warner]

I think the confusion (at least from my standpoint) stems from the fact that none of the architects we do work for charge sales tax, as they are "service" companies, even though they certainly provide a "tangible personal property" in the form of prints. So how come they don't charge sales tax? It could be a Georgia thing, and I just don't know. Or it could be they should charge sales tax and just aren't.

[aaron-cds]

Architects are providing prints as a service to be used in the construction of a building. A rendering is more of a piece of artwork. I wish we weren't viewed as a professional service by our clients. It would be better if we were viewed as art vendors. That way I could demand immediate payment for a rendering as opposed to invoicing for professional services. I could never go to Dell for a new computer and say, uh, I'll pay you in three months when I get paid by my other client. So, my clients get a finished rendering so they can start marketing and making sales right away. Why shouldn't I get paid right away? Sorry for going off topic. My point is that if there was something more concrete in the law books that said we were vendors that have to collect sales tax, perhaps that would allow for an over-the-counter exchange of money for a product instead of waiting around for invoices to be paid. We are, after all, delivering a product. It can also be argued that we provide a service. But in the end, we do hand over a tangible piece of property.

[NickG]

Hi Aaron -

 

we went thru this with our accountant a couple of years ago.

 

They came to the conclusion, that we don't have to collect

sales tax. It never seemed very clear - Missiouri was a

surrounding state that had a clearer stand on this issue - but

we never had a client there and avoided since then

 

And of course - reading this thread, we are wondering again...

 

NG

[Ernest Burden III]

we went thru this with our accountant a couple of years ago.

 

They came to the conclusion, that we don't have to collect

sales tax.

 

On what reasoning did they make that determination?

[NickG]

Ernest - I can't find the paper trail right now, I look later more. somehow, illinois was not an issue. it came back a while later, when we had a client in CA, but even then our accountant determined, we don't need to do that (all files were transmitted via email/ftp).

 

Obviously, this makes us nervous again.

 

NG