Charge Sales Tax on Visualization Services?

[aaron-cds]

Nick,

What company are you with? Just curious.

[chapmandu]

OK. So, one of our accounting staff met with the auditor this morning. She spared me the agony of having to attend with her. In a nutshell, the auditor incorrectly assumed that the product that we were providing was a physical model (i.e. handbuilt etc.). Once our accountant explained to her that we don't do that and that we actually create computer generated renderings and animations, she then officially dropped her concerns about charging sales tax on those services.

 

However, the more they talked about it together, the more "grey" (there's that word again) the area started to look again. In the end, the auditor indicated that if your end product is delivered electronicaly (i.e. email, ftp etc.), then "most likely" you don't have to charge sales tax. If your end product is delivered on a tangible media (i.e. CD, DVD, print) then "most likely" you do have to charge sales tax.

 

We outsource nearly all of our large format printing, of which our vendor charges us sales tax, which we then pass on to our client, so we believe we are covered there. IMHO, this seems like an idiotic way to determine whether or not this service is taxable. Also, how do you like that "most likely" qualifier used?

 

That being said, we are much more comfortable with the situation at hand, but it's still not crystal clear as to how we proceed from here, in terms of what we should and should not charge sales tax for. Even the states auditor admitted that this was a "grey" area.

 

Our accounting staff has indicated to me that in the future, a more in depth discussion on this topic may be necessary.

 

I wish I could bring better closure to the thread, but unfortunately, I cannot.

[ronll]

Interesting that they focus on the medium of delivery. I remember from my days practicing architecture that most architectural sevice contracts refered to the "blueprints" as "Instruments of Service" and as such were not considered to be owned by the client.

[manta]

Doesn't that bring in a whole other issue also...since the artist somewhat retains the copyright to the image...unless he sells that also...isn't the image merely given usage to the client, and not really sold...which would negate "sales" tax...

[louis.cho]

...if your end product is delivered electronicaly (i.e. email, ftp etc.), then "most likely" you don't have to charge sales tax. If your end product is delivered on a tangible media (i.e. CD, DVD, print) then "most likely" you do have to charge sales tax.

 

 

Charge the rendering, without taxes then, for the media price(1$), propose him to have it on cd/dvd, and carge sales taxes on that service(burning the media).

[ikinman]

Doesn't that bring in a whole other issue also...since the artist somewhat retains the copyright to the image...unless he sells that also...isn't the image merely given usage to the client, and not really sold...which would negate "sales" tax...

 

Ownership of copyright doesn't effect the 'tangibility' of the transaction. Rights transfer, however, does. As well as mode of delivery, apparently. One thing to remember is that the sales tax laws were written before computers, and they have not entirely caught up in many cases. Hence the oddities. So it is quite feasible to have the issue dependent on mode of delivery. However, I wouldn't bet on a workaround of delivering a CD for a buck. In NY at least, if one aspect of the project is distributed in a taxable way, then the whole transaction is taxable, not just the cost of a CD.

[Jennifer]

Hi,

 

The state of Illinois does not collect sales tax on services, and we are considered a service. The IL govenor proposed something recently that would have required us to collect sales tax, that was beaten down I believe. That would have complicated things, and been more paperwork and accounting fees for everyone. I think it would only cost us time and money to do this, and not a good thing.

 

Would it make them pay for things faster? Probably not. I get the 'the client hasn't paid us yet' thing every so often, but my agreement is with the architect (or whomever), not their client.

[aaron-cds]

I get the 'the client hasn't paid us yet' thing every so often, but my agreement is with the architect (or whomever), not their client.

 

Thanks Jenni. My agreement is usually with the architect as well but that never stops them from holding out until they get paid first. I should start a loan service instead of a rendering service.

[Ernest Burden III]

The state of Illinois does not collect sales tax on services, and we are considered a service.

 

You are considered a service by whom, by what language? Is there a ruling, or a state document that spells out how architectural and interior visualizations will be classified? Is it a service falling under their idea of design businesses, or art businesses? Do other businesses that provide services--like carpet cleaning--have to collect sales tax? What if they sell the customer something like a bottle of spotremover or a nice printout of the room with a nicer carpet? Does whatever understanding there might be about sales tax on arch-vis require any licenses (like an architect or interior designer might need) or to be registered as a sales tax vendor and simply not need to collect under Rule X (Rule X often needs a form). Or is it just "oh, we don't have to do that"?

 

When we went to NY State with our sales tax issues, each of us that went were under personal risk. The state wasn't really aware of us, but if they had come knocking on our door we could have been hit with huge assessments, fines and interest. But while we knew or suspected that we were expected to collect sales tax, none of our clients thought so and it really wasn't possible to do. So we not only had to go wake a sleeping tiger, but put our heads in its mouth. It was a scary time. But we reached an agreement that allowed us to move forward without becoming lunch, and more importantly, gave us real, understandable rules to follow that even our clients could understand. I think there were a few key factors in making this work.

 

The first was we hired a former NY tax commissioner. Our lawyer used to be the boss of everybody in the room when we had meetings. They all knew eachother, trusted eachother. It wasn't us against them, it was we're all in this together, lets find solutions.

 

The second, and I think more important factor was that the first thing I said to the tax department was "we have no issue with collecting sales tax on our work, we just need clear guidelines so our clients will comply". I think they expected us to try to argue why we shouldn't have to collect the tax. We didn't do that.

 

Also, we talked about how the current 'grayness' meant we had to be seen negatively by our clients, driving them to non-NY renderers, thus hurting business. No state agency wants to be seen as hurting business in their state (even while they might be doing just that) so by working out a deal with us they were supporting NY business. And now, the better our businesses do the more sales tax they collect. They also don't have to spend time hunting us down one-by-one and doing audits.

 

The clear lesson from what the NYSR did is to take the initiative on sales tax and approach the state with ways to work together to achieve a mutual goal. They get compliance with the law, you get to keep your head attached to your body. Waiting for them to come to you is a dangerous game.

[Chad Warner]

After reading this thread, we spoke with our accountant regarding collection of sales tax. Especially in regards to deliverables (DVDs, prints, etc). He told us that because we are not reselling the products, only using them as a means to provide information to our clients, we are not required to collect sales tax.

 

Whether he's right or not, I don't know, but since he's the one who should know, I hope he does.

[Ernest Burden III]

After reading this thread, we spoke with our accountant regarding collection of sales tax...

Whether he's right or not, I don't know, but since he's the one who should know, I hope he does.

 

How much are you willing to bet? What's at stake is something like 7% (or whatever your sales tax rate is) on all sales going back three to seven years, with possible penalties and interest. Can you afford that? I couldn't.

 

I understand the concept that 'deliverables' of paper prints of discs are only meant as conveyances of an intangible asset, but your accountant is still coming at this from the wrong angle--how to argue that we should not have to collect this tax. States want sales tax revenue. States can bury you. States impose a tax on commercial sales, yet we think our commercial sales are going to be seen as 'special'? Why? Absent specific language exempting our work, why should we assume we get a pass?

 

Many countries use a VAT, where a tax is added at just about every step of the process from creator to final consumer. the US uses a one-time tax at the point of consumption. If we knew that our clients, often an architect, were collecting tax on the cost of the renderings, we would be on safer ground. But that is often not what's happening. If our client is a developer, they probably are the final consumer. States look at us and ask 'so where in the chain is the tax being collected'? They don't want to hear 'no-where'.

 

What do we charge for?

-service? The service is that we are like translators, who help you understand something from one language to another? What would be our service?

 

-intellectual property licensing? Because most of us do not sell a copyright, we are really licensing an artistic work or unique asset like Tiger Woods being paid for his name to be used for a model of watch?

 

-a product? When we deliver a rendering that is a watercolor, the client ends up with a painting. I go to clients' offices and see my paintings framed, hanging on their walls. (Others you have to go look in the closet for, but that's another story). I sold them art, like a gallery sells them a Chuck Close canvas? (If only I was that good)!

 

If you cannot easily answer what you sell then how can you expect a state tax department who doesn't have a clue what 'rendering' is to know how to apply existing laws to your business? Look at non-architectural businesses in your state that provide what you think you provide (service/license/product) either to an end consumer or as part of a B2B line, and see if they are required to collect tax, and if not, why. State tax departments start with the assumption that everybody should be collecting sales tax, if you say you should be exempt they will ask just that-why? You should have an answer ready.

[aaron-cds]

Personally, I think our renderings are a service when they're used in a powerpoint slideshow at a village meeting to get a project approved or when they're shown on a marketing website as a sales tool. Technically they are a product when they're framed and hung in someone's private office for their personal enjoyment. Then again, just because a developer hangs up a rendering, is it because they think it's a framed piece of art or they're just proud of the project they're doing? For developers, puting up a rendering of their building is like putting up a picture of their recent charity golf outing with the senator. Just my 2 cents, since debating this issue of product vs. service here is senseless.

 

I think it would be different if we were doing renderings for someone to buy at an art show or from a gallery and put up in their living room. Of course we would charge sales tax.

 

However, 99% of the photorealistic renderings of comercial developments I've seen and 100% of my own comercial renderings, I would not consider to be art. The ones that I do consider to be art are the ones that look like professional photos (Hayes Davidson, a great example). It's strange because the act of creating them is very artistic and I consider myself an artist but I just can't bring myself to considering the end result as a piece of art. I'm flattered when my clients think the opposite, which is rare. For them, I'm providing a service.

 

I really appreciate the work that Ernest and the NYSR have done in the state of NY. It would be great if we could have something in b/w for Illinois. I certainly do not like the possible threat of an auditor knocking on my door.

[Chad Warner]

Look at non-architectural businesses in your state that provide what you think you provide (service/license/product) either to an end consumer or as part of a B2B line, and see if they are required to collect tax, and if not, why.

 

Well, I know our accountant doesn't charge sales tax, nor does our lawyer. We've dealt with paying engineers for their services, and no sales tax there either.

 

I also know that we pay a yearly tax to the city or state ( I can't remember which off the top of my head) that is based on the amount of revenue we make. Maybe this is in place of sales tax for a service company?

[Ernest Burden III]

I also know that we pay a yearly tax to the city or state ( I can't remember which off the top of my head) that is based on the amount of revenue we make. Maybe this is in place of sales tax for a service company?

 

Probably an income tax of sorts. If I make a profit I would pay tax on that to NYS and USA. But, perhaps Georgia has its own VAT? I doubt it.

 

Well, I know our accountant doesn't charge sales tax, nor does our lawyer. We've dealt with paying engineers for their services, and no sales tax there either.

 

Accountants, lawyers, architects, engineers, interior designers (at least in NY) doctors...all are state licensed professionals with well-defined regulations in place. They are usually exempt from sales tax for their receipts as a part of doing business under those licenses. The state gets money from them in providing those licenses. But which of those are we? And, let's not forget that being a licensed architect does NOT mean everything you ever get paid for is exempt from sales tax. It is not. I don't know about the rest of that list. Having one of those licenses is not a tax-free-forever card.

 

Before the NYSR went to the state to work on sales tax, a renderer in the NY market was hit with a huge assessment. He had been a registered architect for decades. The state said his renderings weren't really practicing architecture, and therefor weren't covered by his license. I guess architects don't draw, right? In the end, he was able to convince them he was doing architecture, but partially because one of his regular clients often to him with a blank building site and no design and said 'put something there that looks good'. He really was designing the buildings that he was rendering. I couldn't have won that argument. Oh, and his first response to the tax assessment was to turn for help to the AIA, which he was a member of for many years. Their response was 'good luck, let us know how it turns out'. It was seeing what happened to him that made the NYSR realize we had better deal with this before the state came knocking on our doors.

 

To expand on my point about states always wanting there to be at least one transaction in a production cycle that is sales-taxable: If you read the document that Ian posted, you will find that the State of New York expects anyone who buys from out-of-state to avoid a sales tax to self-asses and remit a Compensating Use Tax equal to the sales tax they avoided. If a NY City architect gets a quote from me for a rendering of $5,000.00 plus NY sales tax, and decided to get it instead from a renderer in New Jersey (or Maine, or Massachusetts) for $5,000.00 without tax, he is still expected to pay NY the 8.375% tax anyway. As in 'no free lunch', or as NY puts it 'supporting our NY businesses'. I would bet that no architect ever in the history of NY State has actually done that, but an astute auditor could dish out some pain if they were auditing.

 

This is just NY, right? If your state does not have clear industry-specific guidelines in place, they will probably use NY and California's as a model. You would be well served to become familiar with those first, because when the state comes to you its too late for friendly negotiations.

 

And you may already be a NY rendering business and not even know it. You would think that you would have to have an office here to be a NY business, and that would certainly do it. But as it was explained to me by the tax department people, even if you only have a sales rep in NY, and not even as a full-time employee, they may consider you a NY business. That was still a gray area which is not fully explained in our published rulings. They said a consideration is whether you have a representative who frequently or periodically provides tangible marketing materials to potential customers in the state of NY. By which they meant brochures, CDs, flyers, DVD discs. So again, anything that a customer can touch and keep can get you into trouble with sales tax. And an open-ended license could also looked as something that they 'keep'.

 

If people from your firm come to NY to meet customers, or work in their offices even for short stints, you may already be doing business in NY State and would be expected to register as a sales tax vendor and collect and turn over the tax on ALL New York invoices, even if it was done completely out of state and delivered by FedEx.

 

There's a lot to think about and a lot at risk. The best approach is the proactive one.

[renderama]

I purposely don't take work from within my state for the exact reason of the sales tax question. I have plenty of work from other areas of the U.S. and 'out-of-state' sales are not taxable in most states. It's the only way I know of to avoid the issue altogether.

[Ernest Burden III]

I purposely don't take work from within my state for the exact reason of the sales tax question...It's the only way I know of to avoid the issue altogether.

 

You could work for free.

[Michael J. Brown]

In the end, the auditor indicated that if your end product is delivered electronicaly (i.e. email, ftp etc.), then "most likely" you don't have to charge sales tax. If your end product is delivered on a tangible media (i.e. CD, DVD, print) then "most likely" you do have to charge sales tax.

 

 

How about simply changing ones end product delivery method to client-accessed, secure FTP only? This way no tangible good is ever exchanged.

 

I realize this may not sit well with some clients, however, it may be an alternative to any sales tax being passed on to them. Some clients may actually consider the potential of sales tax as an incentive to conducting business in this fashion.

 

But let me throw out a suggestion for hard-copy deliverables. Now, this next suggestion may likely be invalidated by an auditor, but what if the client were to supply the blank DVDs to the illustrator for conveyance of the finished work(s)? Can sales tax be charged on a tangible good that is only being returned to its original owner?

[louis.cho]

I ask the accountant at my job. Here in Quebec, we must collect taxes if your annual incomes are 30K and up. It's pretty simple.

[Ernest Burden III]

How about simply changing ones end product delivery method to client-accessed, secure FTP only? This way no tangible good is ever exchanged.

 

Deliver our work in a condom. It's not safe to touch.

 

At the risk of becoming annoying, I must say this yet again:

 

Stop thinking we are special and should have some 'out' from sales tax. Architectural renderings, even if delivered by non-tangible means, are almost always subject to sales tax. Your state tax department will confirm this if you bother to ask them. Sticking your head in the sand or going to great lengths to set up ad-hoc 'loopholes' that may or may not even work is a waste of time and financially dangerous.

[colinsmith]

Some discussion of computer programming now attracting sales tax in Maryland.

Slashdot

[PAWUK]

Interesting thread, just goes to show no matter were you are in the world the Tax man can never give you a straight answer.

 

Were having a few problems in the UK at the moment with our Inland revenue, they have just gone and lost 2 disks in the 'post'!!!! with the name , address , national insurance number , bank details and there children's names of 7 million people (20 million in total if you count the kids in that)

 

Hows that for a Tax man cock up.......

 

 

 

No wonder the government breaks your heart,

They’re enough to make you cry,

You pay tax when you’re healthy, pay when you’re ill,

Then pay again when you die.

There’s only one thing I ask when I go,

And it’s a very simple request,

Don’t put my name please, on the headstone,

So the damned Tax Man can leave me at rest.

 

 

The Tax Man Cometh' by Roy Burton

[louis.cho]

No wonder the government breaks your heart,

They’re enough to make you cry,

You pay tax when you’re healthy, pay when you’re ill,

Then pay again when you die.

There’s only one thing I ask when I go,

And it’s a very simple request,

Don’t put my name please, on the headstone,

So the damned Tax Man can leave me at rest.

 

 

The Tax Man Cometh' by Roy Burton

 

Haha, good one.

Good luck with that 2 lost CDs, I hear of it this morning at the radio.

[chapmandu]

Stop thinking we are special and should have some 'out' from sales tax. Architectural renderings, even if delivered by non-tangible means, are almost always subject to sales tax. Your state tax department will confirm this if you bother to ask them. Sticking your head in the sand or going to great lengths to set up ad-hoc 'loopholes' that may or may not even work is a waste of time and financially dangerous.

 

Ultimately, this is pretty good advice. This is a very complicated issue, and through ongoing meetings and conversations we have had with the State of Wisconsin, we, as a company, have come to a conclusion that we are comfortable with.

 

I've learned a few things throughout this process, like the law is the law, and it doesn't have to make sense, because in some instances here, it isn't very logical.

 

I want to especially thank Ernest and Ian for there insight on this topic, and their willingness to share their experiences from working with the NYSR and the State of New York. For me, this proved to be a valuable example of how I think this issue should be handled from state to state.

[ikinman]

Ernest should get the lion's share of the thanks. He was the president of NYSR when they tackled this issue. As for me, shoulders of giants and all that.

 

thanks,

 

Ian

[FlyinHawaiian]

Was just prepping my estimated taxes and ran across this thread. I had heard that delivery via email or ftp was considered not a "tangible personal property" and therefore exempt from sales tax. But, after stumbling across this troubling thread, I wanted to be doubly sure. I remember there being an assuring snippet about sales tax in the Graphic Artist's Guild Handbook to Pricing and Ethical Guidelines (which I'd highly recommend for freelance artists BTW). That section briefly reviewed the sales tax guidelines in California as they relate to artists and led to a valuable link:

 

http://norcal.gag.org/salestax/index.html

 

There, I found this very pertinent tax regulation:

http://www.boe.ca.gov/pdf/reg1540.pdf

 

Small exerpt:

"(B) Transfers of Electronic Artwork. A transfer of electronic artwork in tangible form is a sale. However, a transfer of electronic artwork from an advertising agency or commercial artist to the client or to a third party on the client’s behalf that is not in tangible form is not a sale of tangible personal property, and the charges for the transfer are not subject to tax." (California BOE Regulation 1540. Advertising Agencies and Commercial Artists)

 

So, apparently, if you deliver via ftp or email, it's not taxable. You'll probably want to dig through the rest of the regulation to further explore the ins and out's of taxable deliverables, but that's the most important part for me.

 

And from the GAG Pricing and Ethics: "It is important to note that artists who take advantage of any of these exemptions must be sure to separate taxable and nontaxable charges on all invoices and carefully document the exemptions. All artists and designers engaged in business in California are required to obtain a California seller's permit and to comply with applicable sales and use tax regulations..."

 

Of course, the easy way to avoid this sticky issue entirely would be to just move somewhere like Alaska, Delaware, Montana, New Hampshire or Oregon that have no state sales tax. (Of course, income tax is another thing entirely, and both state and federal taxes need to be paid, but that's another subject entirely) Well, back to my other taxes... Blech.