One of the biggest technological shifts over the past 30 years has been the move from film-based to digital photography. Professional photography is now almost entirely digital, meaning that no film or negatives are involved at any point in the process. For example, if you hire a wedding photographer, they will probably give you a USB flash drive with copies of your digital pictures instead of an album with physical photographs.
But what does that mean for state sales tax laws? Does the format of a photo; digital vs. print; matter when it comes to determining the photographer’s potential sales tax liability? The Mississippi Supreme Court recently looked at whether digital photography services are subject to that state’s 7 percent sales tax on either tangible personal property of certain specified “digital products.” The Court ultimately concluded that neither tax applied.
The case before the Court; Mississippi Department of Revenue v. EKB, Inc.; involved a husband and wife who own a wedding photography business known as EKB. According to court records, EKB sells wedding packages for between $2,500 and $11,000. All photography is done digitally without film. The client receives a copy of the digital images via either a DVD or a USB flash drive, along with the copyrights to all the photos. EKB also sells some “higher-end packages” that included printed books of the digital photos, but the owners said that they had only ever sold two such packages.
In 2016, the Mississippi Department of Revenue (MDOR) conducted an audit of EKB. MDOR determined that EKB owed approximately $66,000 in sales taxes for sales of wedding packages made between January 2012 and January 2014. EKB sought review of this decision, but the Mississippi Board of Tax Appeals affirmed MDOR’s assessment. EKB then took the matter to court, and a Chancery Court judge agreed that the company’s services were not subject to sales tax. MDOR then appealed the Chancery Court’s ruling to the Mississippi Supreme Court.
On October 6, 2022, the Supreme Court affirmed the Chancery Court’s ruling against MDOR. Justice James D. Maxwell II, writing for a unanimous Court, said that “photography is not a taxable business activity” in Mississippi and that “still digital images are not taxable digital products.” EKB ultimately provided “services” rather than products, Maxwell said, which made a key difference when it came to interpreting state sales tax laws.
As noted above, Mississippi imposes a 7 percent sales tax on the gross sales of “tangible personal property.” MDOR argued that since EKB used tangible property, such as the USB flash drives, as part of its services, that made the entire service taxable. Maxwell disagreed. He noted that MDOR could only cite a case from a Minnesota tax court in support of this position. The Minnesota case, Bakewell v. Commissioner of Revenue, also involved a wedding photographer. The Minnesota court concluded that since customers were “paying for the particular portable and retrievable ‘form’ of the information”–i.e., a DVD of the digital wedding photos–then they were in fact purchasing tangible personal property.
But Maxwell said the Bakewell court’s reasoning “literally places form over substance,” since the Minnesota court said that a photographer’s sales were not taxable if they simply e-mailed the images to the client without using any physical storage. The Mississippi court declined to take a similar approach. Maxwell said EKB’s customers weren’t paying for a DVD or flash drive; they were paying for professional wedding photography services. The tangible items were “incidental” to the non-taxable services.
And on that point, the “sale of still digital images is not subject to sales tax” in Mississippi. Maxwell explained that in 2009, the Mississippi legislature passed law requiring the application of the 7 percent sales tax to “specified digital products.” This included digital books and digital audio works (like MP3 files). But still images were not specified.
Furthermore, photography itself is not a taxable service under Mississippi law. Maxwell observed that there was a very brief period–specifically, from 1955 to 1956–when the legislature did add photography to the list of taxable services. But since 1956, state sales tax has only applied to “the activities of film development and photo finishing.” In this case, EKB never developed any film, and Maxwell said the legislature had not chosen to extend the definition of “photo finishing” to the use of digital editing services like Photoshop. Accordingly, MDOR had no basis for making any assessment of sales tax against EKB.
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