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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, December 21, 2012

The Sales Tax Treatment of Digital Photographs

Philippa S. Loengard (Columbia) & Amanda S. Disanto (J.D. 2012, Columbia), Picture This: A Call for Uniformity in the Sales Tax Treatment of Digital Photographs, 35 Colum. J.L. & Arts 549 (2012):

This paper will argue that states should uniformly impose the same tax treatment on digital transfers of photographs as they do on transfers made through traditional methods, such as when a negative or print is sold. The current sales tax system costs both states and photographers time and money. States suffer lost revenue through uncollected sales tax and through the time that revenue department employees spend in addressing questions from the community in an attempt to clarify confusing and unnecessarily complex laws. Photographers, in turn, must either hire tax practitioners to sort out what taxes are owed or devote energies towards circumventing the tax laws. The current system is inefficient and should change to provide clarity and consistency among the states, creating a new regime where substance is taxed over form.

Part I of this paper will outline the history of sales tax in the United States and the policy implications of having such a tax. Part II will examine how states have developed distinctions between tangible and intangible products and how courts have struggled with this delineation. This Part will then outline and rebut some of the common rationales espoused by states that have not yet extended sales tax to all digital goods. Part III will provide an overview and brief comparative analysis of other goods that have similar sales tax implications to that of digital photography. Included in this discussion are computer software, ringtones, music and e-books. Part IV, section A will focus on the history and taxation of photography. Part IV, section B will describe the rise of digital photography and summarize the various methods through which photography can be disseminated to consumers. Part IV, section C will demonstrate how something as trivial as the method by which photographs are delivered can determine whether or not sales tax currently needs to be collected and remitted. It will also explore the problems caused by outdated tax laws that fail to account properly for the prevalence of digital sales and discuss objections to the taxation of electronically transferred photographs. Part V will detail efforts to simplify and clarify sales tax law and will highlight the efforts of the Streamlined Sales Tax Project (SSTP) to create uniformity among states' tax regimes. Finally, our conclusion will advocate that states eliminate arbitrary distinctions between digital and nondigital goods and revise their tax codes to provide photographers with clear, consistent and comprehensive guidance on when sales tax is due.

In order to make this topic manageable we acknowledge some constraints. First, in conducting interviews we contacted members of the American Society of Media Photographers (ASMP), America's largest organization representing professional commercial photographers. They, in turn, led us to a variety of photographers across the country. While we were able to garner significant anecdotal evidence, we were not able to reach out to a large enough number to complete a true empirical study of the effect of current or proposed legislation on the industry as a whole. Additionally, we will not differentiate between sales and leases of photographs. Often when a photographer “sells” an image, he or she is charging the customer for a hard copy or digital copy of the image, but retaining the copyright in the work. In addition, there is often a time limit involved. Thus, many photographers consider transactions such as these to be leases. The states, however, normally view these transactions as different in name only and their tax treatment is generally identical. We also acknowledge that there are some images that are transmitted digitally but that are not taxed because they are determined to be sales for resale. Finally, many photographers feel that they should not pay tax on their sales because they consider them a service transaction rather than a sale of goods. If the item is classified as a service, a topic we will address below, then it may be removed from the tax regime and concerns about sales tax policy are moot. Our arguments are focused on those transactions which are subject to sales tax, and our position is that once an image is subject to taxation, said taxation should not differ based on the image's format.

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