A Short Course in Sales and Use Taxes for Artists (Part 1)

A reader (Richard Streitfeld at peaceloveandbusinessplanning.com) recently asked me about sales taxes related to art and artists and I referred him to an article I’d written a while back. We continued to exchange emails and he told me about the writing and training he’s done on this topic.  He inspired me to try my own spin on this. In weak moments I think of myself as an artist, so maybe an article for the right-brained folk might be interesting.

I’m going to be writing this article in multiple parts because this is going to take some time. And this should be useful not only for artists but for other entrepreneurs as well. Most of the issues an artist faces will be dealt with by other businesses as well. So this “course” will apply to pretty much everybody.

Some of you may have taken issue with something I said above. Yes, if you’re selling your art, you’re in business. And you should be collecting and paying sales and use taxes as the law requires, just like any business. I’ll make the assumption that you want to do that. Everyone should be paying their fair share, right?

I’m going to avoid some of the theory that I love to talk about it. I will also be omitting, skipping and simplifying to keep the right-brained among you interested. But please see the disclaimer.  Get a second opinion; don’t take my word for it. I’m just trying to give you an overview. I strongly urge that you sit down with an accountant and discuss the issues I’ve raised here. And if you don’t have one, you’re making a big mistake.

OK, let’s dive into it.

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Things that you sell

I hate to break it to you, but to be very plain spoken, if you’re an artist and you’re in the business of selling your art, you sell stuff*. And sales of stuff are generally taxable. So if you sell a painting, you should be charging tax. And if you sell a photograph, you should be charging tax. If you sell crafts, you should be charging tax. If you're a musician and you're celling CD's at the back of the room, you should be charging tax.  It doesn’t make much difference if you sell five pieces a year or 500 a year. If this is your work, then you should be charging tax.

If you sell something from a web site, like Etsy, eBay, or your own web page, you should be charging tax. However, there’s a big exception here. If you’re shipping to someone who's not in your state, then you may not have to charge them tax. And the taxes that apply are based on the state you’re shipping to. If you’re not in that particular state, you probably don’t have to worry about charging taxes for that other state.

However, if you’ve visited clients (or prospective clients), done art shows, worked on an exhibit, have work on consignment at a gallery, or done any other kind of work or performance in that other state, or paid someone else to do so, then you may need to charge that state’s taxes. And yes, if you do that art show in another state, you should be collecting that state’s taxes on any sales you make both during and after the show.

Remember this also means that it's taxable when you sell something to someone who is in the same state you are.

And just charging taxes isn’t enough. You have to send that money to the appropriate state. Which means you must register in that state and start filing sales and use tax returns. You don't just write on a scrap of paper "here's your taxes" and mail them a check.  You have to register and then fill out a very left-brained form.

And to make matters even worse, the rules are completely different in every state. So if you do an art show in one state, and then do some production artwork in another, it's not going to be the same.

Are you sure you don’t need an accountant?

That’s enough for today. There’s lots more.

I'll post a link to the next articles as they get posted.  Here are all of them published so far.

Part 1 - Introduction and overview
Part 2 - Services that you sell and buy

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*My definition of stuff, to make it really easy: A single piece of stuff is something you can hear, see or touch and that can be moved without damage. This isn't complete but it's about 90% of the way there.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

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Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

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Where did the sale occur? (Part 3)

This is part of a mini-course on the two major types of sales (intrastate and interstate) and their impact on sales tax and use tax.

This is part 3. Here is part 2. Please start this series with part 1.

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When last we left our hero, the great state of Texas, they were just trying to get their money from somebody. As we saw in part 2, there was a good chance that Brad wouldn't pay the use tax on the motor he bought from Jennifer because he was, well, stupid. We'll give him the benefit of the doubt. He just didn't know.

But maybe Texas can get Jennifer to collect it from Brad. Maybe.

To refresh your memory, here's the transaction:



The problem for Texas, as things stand, is that they can't make Jennifer collect tax from Brad. They can't make Jennifer collect sales tax because of that darned Constitution that we mentioned in part 1. And they can't make Jennifer collect Brad's use tax because Jennifer is in Tennessee! She isn't in Texas. They have no jurisdiction over her.

Now there are a lot of situations where a state can reach across a border and grab someone by the collar. But this isn't one of them. Jennifer is in Tennessee. Based on what you know so far, Texas can't touch her.

So they're still out the taxes.

But wait!

Jennifer has a sales rep - John.



John visits Texas five or six times a year. He flies into Dallas, drives around for a few days and flies out of Houston. Now Jennifer is in trouble. John's physical presence in Texas gives Jennifer nexus in Texas. Texas can now make Jennifer collect the use tax from Brad and remit the money to Texas. Yay!

So to summarize:


1. Angelina charged Brad sales tax because it was an intrastate sale in Texas.



2. Jennifer didn't have to charge Brad sales tax because it was an interstate sale and the Constitution restricts the ability of states to tax interstate commerce.

3. Brad owes tax on his use of the motor once he receives it in Texas

4. Brad probably isn't going to pay that use tax.

5. Texas would really like to get Jennifer to collect that use tax.



6. Which they can now do because Jennifer has a physical presence in Texas - nexus.

When the sale is intrastate, the tax that usually applies is sales tax
When the sale is interstate, the only tax that can apply is use tax.

And to answer the question that has lead all three of these articles, it's Texas. It was Texas when it was an intrastate sale. And it was Texas when it was an interstate sale because the only applicable tax in that situation is use tax. Which obviously can only be imposed in the state where Brad receives the goods. So the golden rule is that the state where the buyer receives the goods will be the state that imposes the tax.

Thank you for your patience. No more mini-courses for a while. Although, I like the maps. So you'll see those again. Real soon.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Where did the sale occur? (Part 2)

This is part of a mini-course on the two major types of sales (intrastate and interstate) and their impact on sales tax and use tax.

This is part 2. Here is part 1. Please start this series there.

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Remember, from part 1, that Jennifer doesn't have to charge sales tax, for any state, on her interstate sale to Brad. The Constitution says so. The states can't tax interstate sales.



In this situation, the responsibility therefore falls to Brad to pay use tax to Texas. Texas is the state where Brad took control of the motor for the first time - where he used the motor for the first time. Therefore, Texas gets to impose use tax on his use of the motor.

But Texas also knows that Brad is unlikely to pay this use tax. If Brad is an individual, it'll never happen. But in this situation, Brad is a business.

The problem is that if Brad is a small entrepreneurial operation, he doesn't even know he's supposed to pay something called use tax. His accountant (if he has one) probably doesn't know. If Brad hired a bookkeeper or AP specialist to help him, they would probably know about the need to accrue use tax because they did it at their previous job. But Brad hasn't gotten to the point of hiring any experienced office staff yet, other than his sister-in-law. He's in start-up mode, and he's just trying to survive.

Many small businesses are just not going to pay their use tax.

Texas knows this. And they also know they can't make Jennifer collect sales tax from Brad, because of that durned Constitution (see above).

But maybe they can get Jennifer to collect the use tax from Brad. Use tax is not a sales tax. It's not a tax on the transaction, so the Constitution doesn't get in the way. And it is the tax that Brad owes, since there was no sales tax imposed. So why not make Jennifer collect use tax from Brad instead of the sales tax?

You would be right! They can make Jennifer collect the use tax from Brad.

Or can they?

See part 3

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Where did the sale occur? (Part 1)

This is part of a mini-course on the two major types of sales (intrastate and interstate) and their impact on sales tax and use tax.

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The sale occurs when two events have happened. It begins when the seller ships the goods. It ends the buyer receives the goods.



In this example, Angelina ships a motor to Brad. The sale begins when Angelina (the seller) does her job - when she ships it.

The sale ends when Brad (the buyer) takes control of the motor - when he receives it at his receiving dock.

Angelina ships it from Amarillo, Texas.

Brad receives it in Houston, Texas

The sale began in Texas. And it ended in Texas.

This is what is called an intrastate sale. It's a sale that happens within the state.

Intrastate sales are easy. You just charge sales tax (if you’re the seller). And if you’re the buyer, and the seller doesn’t charge you tax, ASK!

But let’s say that, instead of buying from Angelina, Brad decides to buy the motor from his old friend, Jennifer. She’s in Nashville. So Jennifer ships the motor to Brad in Houston.



As you can see, the sale started in Nashville, Tennessee.

The sale still ended at Brad’s receiving dock in Houston, Texas.

This is called an interstate sale. The sale begins in one state and ends in another state.

Interstate sales are a problem. Because of this darned document.



Article I, Section 8 of the Constitution for the United States of America says that

“The Congress shall have power …

…To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;”

According to the courts, this essentially means that, with a couple of exceptions, only Congress can tax interstate commerce. The states can't tax interstate commerce.

Therefore, because of the Constitution, Jennifer doesn’t have to charge sales tax for either Tennessee or Texas.

Bummer.

The problem for Texas is to figure out a way to get their money when Brad buys from Jennifer. Hey, it's a sales tax cliffhanger!

Here's part 2

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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