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Wedding photographer Scott Burton of Oxford MS was not charging sales tax on his wedding packages. To a couple facing say a $5,000 tab for his service, you could see tacking on another $350 for the 7% Mississippi sales tax would make a difference. Unfortunately, on audit the Mississippi Department of Revenue (MDOR) determined that his company EKB Inc should have been charging sales tax and assessed EKB $65,597. The Mississippi Supreme Court had good news for Burton earlier this month as it upheld a Lafayette County Chancery decision that overturned MDOR’s assessment.

This is probably a case of the legislation not keeping up with changes in technology. The Mississippi sales tax is on tangible personal property. Tangible means something you can touch and feel. “Personal” means it is not something permanently attached to land or a building.. I know you knew that but you have to consider the other readers. Mississippi also taxes some services. Among those are “film development” and “photo finishing”. According to the decision, Burton never uses film.

The State’s Position

The auditors examined the contracts for Burton’s various packages and found that that all the packages included one or more items of tangible personal property

– either a DVD or a flash drive with printable pictures,

– at least one 8×10 picture in a 16×20 matte,

– at least one coffee table book,

– iPad with wedding photos on some occasions, and

– other items.

The DVD or flash drive would generally contain two to three thousand printable images. The coffee table book which contained about 100 photos was included in most of the packages. In the view of the auditors there was also some “photo finishing” going on – photoshopping, enhancing, retouching, editing, cropping, changing the hue and altering the tint, brightness and focus of photographs.

In its order, the trial court found that it was undisputed that each customer received a package including a disc or flash drive containing photographs and sometimes a matte, coffee table book or iPad.

The Chancery did not see it the way MDOR saw it.

Each contract expressly listed what each client would receive for their chosen package. The vast majority of what the client would receive from any given package was the services of one or more photographer, a stated number of hours of service and ultimately the digital images to which the client owned all rights. Only a small fraction of each package consisted of anything that might be considered tangible property.

Supreme Court Decision

Lawrence Lee Little issued the Supreme Court of Mississippi decision on October 6, 2022. The Court upheld the Chancery decision. He notes that photography is not a taxable service unlike film development and photo finishing. Burton does not do any of the latter two “the process of developing and printing photographs from negatives”. “Digital images” are not among the “specified digital products” subject to sales tax. What about the “tangible personal property”?

Judge Little indicated that the Mississippi Supreme Court has recently moved away from the the standard of giving deference to agency interpretations of statutes. That is a big item for discussion in federal cases currently.

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MDOR argues that a pile of a few thousand photos or a flash drive are both tangible things. So EKB is selling tangible personal property. They cite a Minnesota decision (Bakewell) that held that where it was commented that it would have been different had the images been transmitted electronically. Judge Little was not buying that:

But the Bakewell approach, which the MDOR urges, literally places form over substance. It makes an arbitrary distinction between digital images transferred from Burton’s computer to the client’s computer by disk, which Bakewell ruled was taxable, and digital images transferred from Burton’s computer to the client’s computer by electronic mail, which under Bakewell would not be taxable. In reality, EKB’s clients did not pay EKB thousands of dollars for a jump drive or DVD that they could purchase at an office-supply store for a few dollars. Clients paid EKB thousands of dollars for Burton to take digital photographs of their wedding. And the undisputed facts show EKB’s customers did not receive Burton’s photographs in tangible form—they did not receive printed photographs, negatives, or film. Instead, they receive purely digital images. The tangible drive or disk is incidental to the nontaxable photography service being provided, much like the paper on which a lawyer prints a will, which is not subject to sales tax.

Background

I spoke with James Williams “Will” Janoush who represented the EKB and the Burtons. He confirmed my suspicion that the assessment of nearly $70,000 in sales tax that had not been collected from clients was devastating for the small business. Janoush told me that the rules in Mississippi about tax appeals have changed in the last few years. It used to be that there was only appeal within the Department. In order to get a court to consider it, you had to pay the tax and sue for refund. He also indicated that MDOR can be pretty stubborn. He is not certain that they will change their regulations even after losing at the highest level in the state.

Implications

I once did a piece where I tried to think through the sales tax implications of the replications, they have on Star Trek. More realistically there are those 3-D printers. Having taxing systems that are tied into tangibility versus intangibility may not work so well as time goes on. Especially if we all move into the metaverse.

Other Coverage

Michael Nunes has Miss. Justices Find Digital Photos Exempt From Taxon Law360.

Peggy Cooper has Mississippi Digital Wedding Photos Tax-Free, High Court Says in Bloomberg Tax.

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