Do I need a business License? Here's the situation...

[Zwaeback]

Hello,

I'm filling out my taxes right now...going through the ins & outs of the laws finding rules to my advantage and maybe some not to my advantage.

My personal (meaning my own business) professional work for 2000 & 2001 has been for one client/company that's about 100 miles from me. The work involves creating digital character drawings for a comic book series & animation. the drawings are then used to promote the product to other companies. I transmit all files by ftp or email. The CEO & his accountants determined that we aren't responsible for sales tax, since there is no actual exchange of property. If I was to send them a disk with the files on them, that would be an actual exchange involving sales tax.

I have a business card, photos of my home studio space (only 170 sq ft), & a web space. Now...for the city business license. It looks like its for those who sell material goods or services. Should I have one of these licenses? I just don't want to get one if it's going to get me into a mess.

Thanks for your help. I think this topic should be somewhat useful for those in the forum. How many of you do or don't have business licenses & still do professional work.

Phil

[jackddavis]

Interesting question. My wife and I are both self employed. She has her business and I have mine. Her business (a service business) is not licensed and mine is. To start my business, I filed an ABN (Assumed Business Name) with the State which was later superceded by a State registration/license. This was not an art related business. However, as I am beginning to sell some of my artwork, I'm running all sales and expenses through my business, since the organization is already there.

In your situation, I would think that, since a sale took place, and something tangible was delivered, that a sales tax would apply. Perhaps a visit to an accountant would get your question answered without upsetting the applecart.

[Zwaeback]

Thank you Jack.

I should also probably give some of my fellow artists a call & see how they are handling the sales tax....:0)

Phil

[Zwaeback]

....of course I've only had a chance to skim over it.

What caught my attention is this,"If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred."

....as much as I don't like to take one iota of time on this....I guess its a good idea to know the rules of the game...:0)

Phil


Regulation 1501. SERVICE ENTERPRISES GENERALLY
References: Sections 6006, 6015, Revenue and Taxation Code.
Persons engaged in the business of rendering service are consumers, not retailers, of
the tangible personal property which they use incidentally in rendering the service.
Tax, accordingly, applies to the sale of the property to them. If in addition to
rendering service they regularly sell tangible personal property to consumers, they
are retailers with respect to such sales and they must obtain permits, file returns and
remit tax measured by such sales. If their purchases of tangible personal property are
predominantly for consumption rather than for resale, they should not give resale
certificates covering such purchases but should follow the procedure prescribed in
the regulation governing ‘‘Tax-Paid Purchases Resold.’’
The basic distinction in determining whether a particular transaction involves a sale
of tangible personal property or the transfer of tangible personal property incidental
to the performance of a service is one of the true object of the contract; that is, is the
real object sought by the buyer the service per se or the property produced by the
service. If the true object of the contract is the service per se, the transaction is not
subject to tax even though some tangible personal property is transferred. For
example, a firm which performs business advisory, record keeping, payroll and tax
services for small businesses and furnishes forms, binders, and other property to its
clients as an incident to the rendition of its services is the consumer and not the
retailer of such tangible personal property. The true object of the contract between
the firm and its client is the performance of a service and not the furnishing of
tangible personal property. Similarly, an idea may be expressed in the form of
tangible personal property and that property may be transferred for a consideration
from one person to another; however, the person transferring the property may still
be regarded as the consumer of the property. Thus, the transfer to a publisher of an
original manuscript by the author thereof for the purpose of publication is not subject
to taxation. The author is the consumer of the paper on which he has recorded the text
of his creation. However, the tax would apply to the sale of mere copies of an
author’s works or the sale of manuscripts written by other authors where the
manuscript itself is of particular value as an item of tangible personal property and
the purchaser’s primary interest is in the physical property. Tax would also apply to
the sale of artistic expressions in the form of paintings and sculptures even though
the work of art may express an original idea since the purchaser desires the tangible
object itself; that is, since the true object of the contract is the work of art in its
physical

[Zwaeback]

....but you know i just noticed the last line of the paragraph.

"Tax would also apply to the sale of artistic expressions in the form of paintings and sculptures even though the work of art may express an original idea since the purchaser desires the tangible object itself; that is, since the true object of the contract is the work of art in its physical"

It seems like it depends on the intent of the work. When I do digital paintings the intent is to produce art that can then be reproduced many times. It makes sense to tax the reproductions, but not also the original work of art.

Just some thoughts.

Phil

[Zwaeback]

http://www.boetaxes.ca.gov/business/vol1/sut/sutr.pdf

[TPS]

Be careful because in some states services are also taxable. You should research that angle as well as the product end.

IMO you have provided a service which 'is' provided in a tangible form, that is as a digital file. Simply because it is transmitted by electronic means, does not mean it is not a physical product. It is received on the buyers end and stored in a physical format, i.e. on a harddisk, a cd, or whatever storage media used. If it weren't for the equipment on which it resides and is made visible, then it would not be a usable product.

That said, the tax is normally not collected until the end of the production process and is paid by the end user. If what you have provided is not the final form of the product then you most likely do not collect the tax. It would be collected from the purchaser of the prints, or calendars, or computer program, etc. If they are using your drawings in their advertising, then they are the end user and should be submitting tax to you.

Now to the original question of a business license. Different states and municipalities have different requirements. Depending on the nature of the business, some require a license and others only require you to be registered. IMO if you are transacting business of any kind, and receiving income from it, then you should have a business license or be registered. It matters not what kind of business; service, manufacturer, retailer, distributor, etc. A home based business often has to have special clearance from the city and your neighbors. Without the proper records you likely are not entitled to any business deductions or other tax advantages.

If you are selling products or services which require the collection of sales taxes, you also must have a state permit for collecting and remitting said taxes to the state. If you don't you could be liable for all the taxes you should have collected plus interest and fines.

You mentioned you were doing your taxes. Keep in mind that income taxes and sales taxes are two separate concerns. Sales taxes are passed through your business to the state and are not considered income.

[Zwaeback]

Thank you TPS.

I'm going to continue trying to figure out what i need to do.

Phil

[El_Elegante]

It sounds like you are selling rights too use a digital image. Don't you have to pay sales tax on the sale of intellectual property? There may be other ways to structure the transaction. Such as defining your work as a service, rather than a sale of intillectual property or rights of use, but if you define yourself as preforming a "service", that probably legally implies that you have no ownership or rights to the images you creat. How do royalties work? do you pay sales tax on them?

For example, occassionally, I am subcontracted to do some drawings or designs for an architecture firm.. I am pretty sure that the firm retains all rights to the designs and drawings I do.. I don't think technically I can publish or reproduce them for my own benifit... I think it is similar to the rules that would apply if I was a direct employee of the company. Am I correct here?

It may also be possible to define it as an e-bussiness. Which would be subject to in-state sales tax, but not out of state tax. if the person is in a different local... just a thought.

[Zwaeback]

...first off....i got a business license the other day. it was extremely easy. hardest part was finding city hall.....;)

The digital character illustration i've done isn't my property. The company I contracted to owns the rights to the characters....so yes I have no legal rights to ownership of the illustrated character work. I could probably print the work or show what I've done to other people, but I could never do it for profit, just show and tell. From what I've been told that is the situation.

Some other contract work I'm doing involves medical illustration for a university. I have absolutely no want or need for ownership of this work.

Other work I'm getting into involves prints of my paintings. I think tax would be on the prints, not my original work.

Just some thoughts.

Phil

[geckonia]

I have called the Board of Equalization here in CA about transfering digital files and indeed there is NO SALES TAX. I said "but it is physical! It's on their disk!" Web design is a good example. No sales tax required because no property changes hands. Give your sales tax people a call, they're very helpful.

Also, if you sell a final design you can charge tax on just the final piece, not the work you did developing the idea. This can cut the cost to your clients.

BTW, royalties don't have sales tax either.

[Zwaeback]

Thanks for the interest.

Its good to know that I could call the CA tax board if need be. Wait, actually i did call them. I had to get a CSN number for filing my taxes online. ....& you're right, they were nice. They weren't anything like the "suits" in Matrix.....;) I think they were human in fact.

Phil

[geckonia]

The Board of Equalization is very tricky! Their rules and regulations are confusing and for me personally, filing my Sales Tax returns is one of the biggest pains about being a business owner. They even had the audacity to audit me my third year in business. "When you grab a tail you don't know if you've got an elephant or a mouse." Like I was hiding all my income from them... after 3 minutes here the dude waived the audit. So do yourself a favor and get to know their rules. They even want you to pay sales tax to them for business items purchased out of state with no sales tax. I know a business who didn't realize this and ended up with a huge debt. So yes, you will be filing with the IRS and the BoE, if you make enough they will make you file quartely...oh joy!

http://www.boe.ca.gov/regs/lawruleregcont.htm

[Zwaeback]

Geckonia,

Thanks for relating your business with the BOE. That helps me know just how careful & precise I need to be with my business. So far i've kept records of everything i can record & as far as i know i've paid taxes for everything i've bought. i haven't had a choice....:)

Phil