By John Aaron, CPA
The new Maryland 6% tax on digital products is a sales tax, not an income tax. It does not apply to every creator of digital products in the chain of making a media product. Entertainment attorney Kurt Klaus and I will be available to expand on this and other topics during the #ScriptDC Legal and Business Needs for Your Media Project on January 25th. Register here
You are familiar with the sales tax process – for instance when you purchase an item from a retail store for your personal use. The tax comes out of your pocket, NOT the store’s, because you are the end user. The store merely collects it and then remits it to the state.
Similarly, when the retailer purchases the item for its inventory (which I later purchase for my personal use), it is a “reseller” and may claim an exemption from sales tax.
Thus, a person other than an end user, may claim the resale exclusion and avoid payment of the sales and use tax on the purchase of a digital product if purchased with the intention of:
· reselling the digital product in the same form that the buyer receives or is to receive the digital product;
· incorporating the digital product into another digital product intended for resale;
· transferring that digital product to a buyer in the form of a taxable service;
· or incorporating the digital product into a physical product.
Here’s an example of why I highlighted the second bullet regarding the incorporation of the received “digital product into another digital product intended for resale”. Let’s say I deliver a rough-cut sound edit to a producer as a digital file. Is it a digital product? Yes. A “digital product” means a product that is obtained electronically by the buyer or delivered by means other than tangible storage media using technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.
NOTE: Be sure to see example #1 below that distinguishes between non-taxable services and products. Imagine that my contract as an sound editor was to provide a the rough cut solely for approval, and upon approval, there is a separate cost stated for polishing the final cut.
What happens next? Let’s say the producer incorporates the final sound cut into another digital product – the final film, which might contain other elements, such as animation or special effects, that are combined in post. Is the producer the “end user”. It depends on their intention. I would personally argue that if the producer, say, enters the film into film festivals for with the intention to resell it, the reseller exclusion would apply.
Here are more exclusions:
FILM PRODUCTION ACTIVITIES
The sales and use tax does not apply to a sale of tangible personal property, a digital code, a digital product, or a taxable service used directly in connection with a film production activity by a film producer or production company certified [for a film production credit] by the Department of Commerce.
PHOTOGRAPHY AND VIDEOGRAPHY SALES
The sale of a photograph, stock photographs or stock artwork, clip art, portrait and wedding photography, pictures and similar products are digital products if delivered electronically. The services to produce photography, artwork, clip art, portrait and wedding photography, pictures, videos, and similar digital products, when separately charged from the digital product result of such services, are non-taxable services.
EXAMPLE 1 FROM THE COMPTROLLER’S TAX TIP #29
Separately state the cost of the Non-taxable services:
A photography and video company, Photos, Inc. is engaged by Company Y, a Company with all of its operations in Maryland, to take photos and videos of Company Y’s products for use on Company Y’s website and social media advertising to sell its products.
The contract between Photos, Inc. and Company Y provides that:
• Photos, Inc. will charge Company Y $10,000 for the service to take the photos and videos of Company Y’s products and provide draft proofs for Company Y’s viewing and approval, with no obligation to purchase the photos or digital product;
• If Company Y requests to purchase the final digital photos or videos, Photo, Inc. will charge $2,000 to produce the final digital graphic images, photos, or videos to be utilized by Company Y on its website and social media advertise to customers in Maryland.
Photos, Inc. invoices Company Y separately for the $10,000 of services and $2,000 to produce the final digital products. Photos, Inc. is not required to charge Maryland sales tax on the $10,000 of photo and videos services as they are non-taxable services.
Photos, Inc. is required to charge 6% Maryland sales tax on the $2,000 for the final digital products including graphic images, photos and videos as Company Y’s use of the digital products on its website and social media advertising to sell its products.
Hope you all find this helpful. Please join us at the #ScriptDC Legal and Business Needs for Your Media Project on January 25th for more topics of interest. Register here.