Administrative Review and Hearings Division Decision
The Administrative Review and Hearings Division (ARHD) determined that the taxpayer’s sales of digital photographs are subject to retail sales tax. The taxpayer, a portrait photography business, protested the Department of Revenue’s assessment of retail sales tax on its sales of digital photographs on the grounds that it provided “photography for hire” services, which are not subject to retail sales tax.
Contract Terms and Tax Assessment
The ARHD noted that the taxpayer’s contracts with customers specified that the sale included edited images, which are produced and edited by the business before being electronically transferred to the customer.
The ARHD concluded that because electronically transferred images are considered a “digital good”, and sales of digital goods are subject to retail sales tax, the Department properly classified the business’s sales as retail sales.
Liability for Retail Sales Tax
Because the taxpayer was required to collect retail sales tax on each transaction, the taxpayer is liable to the state for the amount of the tax, regardless of whether the failure was the taxpayer’s fault or a result of acts beyond the taxpayer’s control.
Washington Tax Determination No. 20-0178, 06/26/2020, 41 WTD 199, released 05/16/2022.
Frequently Asked Questions
Are digital photographs considered digital goods for tax purposes?
Yes. According to the Administrative Review and Hearings Division (ARHD), digital photographs that are electronically transferred are classified as digital goods. Sales of digital goods are subject to retail sales tax under Washington law.
Why did the Department of Revenue assess retail sales tax on the taxpayer’s photography business?
The Department determined that the taxpayer was selling digital goods (edited digital images), which are subject to retail sales tax. Despite the business claiming it provided “photography for hire” services, the nature of the transaction, transferring edited images electronically, qualified it as a taxable retail sale.
Does “photography for hire” exempt a business from collecting retail sales tax?
Not necessarily. While “photography for hire” services may be exempt in some contexts, the ARHD emphasized that when the end product is a digital good sold to the customer, retail sales tax applies regardless of the service label.
What role did the contract terms play in the tax decision?
The contract terms were pivotal. The ARHD noted that the contracts specified the delivery of edited images, making it clear that the product being sold was a digital good. This clarity in the agreement supported the Department’s classification of the transaction as a taxable retail sale.
Is the taxpayer responsible for the sales tax even if it wasn’t intentionally avoided?
Yes. The ARHD ruled that the taxpayer is liable for the sales tax whether or not the failure to collect it was intentional. Even if the oversight was due to misunderstanding or external factors, the business must pay the tax owed to the state.