Alabama Court rules photography services not subject to sales tax
Transfer of photographs merely incidental to delivery of service
TAX ALERT |
On April 29, 2016, the Alabama Court of Civil Appeals issued its decision in State Department of Revenue v. Omni Studio, LLC, affirming the decision on summary judgment by the Jefferson Circuit Court that a photography studio’s sales of photography services were not subject to sales tax because the transfer of tangible personal property, in this case photographs, was incidental to the services provided.
Omni is a photography business that provides photography services to other businesses, such as advertising and marketing firms, and individuals for special events, such as wedding parties. Omni provides its clients a wide range of services, including helping its clients design advertising campaigns or magazine layouts; hiring and managing assistants, models, stylists, and other necessary team members; choosing locations; setting up lighting; and reviewing, processing, and editing images and videos. Omni charges its clients for these services based on the time and resources spent rather than based on the number, size, or type of photographs actually produced, and these charges are payable regardless of whether any photographs are produced or delivered. Based on these facts and circumstances, Omni took the position that its sales of photography services were not subject to Alabama sales tax, and, therefore, it did not collect and remit sales tax on its transactions with its customers.
The Alabama Department of Revenue audited Omni, and determined that, because Omni’s services ultimately culminate in the production of photographs that are transferred to Omni's clients, Omni’s sales of photography services were taxable sales of photographic images within the meaning of Ala. Admin. Code Rule 810-6-1-.119. Omni appealed, and the Jefferson Circuit Court ruled in Omni’s favor on its motion for summary judgment, determining that Omni’s transfer of photographs was incidental to its provision of photography services, and, as such, did not convert the provision of a non-taxable service into a taxable sale of tangible personal property. Subsequently, the Alabama Department of Revenue appealed this decision to the Alabama Court of Civil Appeals.
On review, the Alabama Court of Civil Appeals found that its prior decisions in State v. Harrison, 386 So. 2d 460 (Ala. Civ. App. 1980) and State v. Kennington, 679 So. 2d 1059 (Ala. Civ. App. 1995) were controlling. In Harrison, the Alabama Court of Civil Appeals ruled that a public relations business that provided brochures and catalogues to its customers as part of its public relations services was not required to collect and remit sales tax on its transactions because the transfer of the brochures and catalogues was merely incidental to the rendering of non-taxable professional services. Similarly, in Kennington, the Alabama Court of Civil Appeals ruled that a portrait artist’s sales of painted portraits to his clients did not constitute taxable sales of tangible personal property because those transfers, like the transfers of catalogues and brochures involved in Harrison, were merely incidental to the sale of the artist's creative services. The court found no reason to distinguish between the activities of Omni and those considered in Harrison and Kennington, and upheld the decision of the Jefferson Circuit Court in Omni’s favor.
This decision is representative of the difficulties that can arise in sales tax when obtaining tangible personal property is a significant part of the true object of a transaction, but, ultimately, that tangible personal property is merely the vehicle for delivering a professional service. In regard to photographic services, clearly the intent of the purchaser is to obtain one or more photographs, which would fall within the definition of a taxable sale of tangible personal property under the department’s regulation. However, this objective is outweighed by the purchaser’s desire to obtain the photographer’s skill and professional judgment in relation to the subject of the purchaser’s choice (e.g., the purchaser’s wedding) rather than stock photographs (e.g., pictures of weddings). When considering the Alabama sales tax implications of sales of services with a tangible deliverable component, sellers and purchasers should review their facts and circumstances in relation to those considered in this decision, and determine whether the facts and circumstances indicate that the tangible deliverable component is merely incidental to the sale of the service.