United States

Alabama: Transfer of Photographs Incidental to Provision of a Nontaxable Service

May 09, 2016
From KPMG TaxWatch

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The Alabama Court of Civil Appeals recently addressed whether a photography business’s transfer of photographs was incidental to the provision of a nontaxable service. The taxpayer provided commercial photography production services to business entities, such as advertising agencies and magazine publishers. In the course of performing these services, the taxpayer assisted clients with designing advertising campaigns and magazine layouts, hired and managed assistants, models, stylists, and other necessary team members, helped to identify locations, and reviewed and processed images and videos. The Department of Revenue audited the taxpayer and concluded that it owed sales tax on various transactions. The basis for the assessment was that all of the taxpayer’s charges ultimately cumulated in the production of photographs that were transferred to clients in what constituted a taxable sale of tangible personal property. This position was based in part on a departmental regulation, which generally provided that gross proceeds from retail sales of photographs were subject to sales and use tax without any deduction for costs associated with producing the photos. The taxpayer argued that, despite the regulation, any transfers of tangible personal property were incidental to its provision of a nontaxable service. After a trial court ruled in favor of the taxpayer on a motion for summary judgment, the Department appealed.

In support of its position, the taxpayer cited to earlier decisions in which Alabama courts had held that taxpayers providing professional services involving some incidental transfer of tangible personal property were not engaged in taxable sales of the transferred property. One of these cases involved the sale of catalogues and brochures by an adverting agency and the other involved the sale of painted portraits. The taxpayer argued that there was no distinction between it and the taxpayers in those cases. The Department, on the other hand, cited to certain ALJ determinations as support for its position that photographers do not perform professional services and are liable for tax on services necessary to produce the finished photographs. The court rejected the Department’s position. First, it noted that some of the earlier ALJ decisions actually recognized that certain creative services performed by a professional photographer may not be taxable. Furthermore, although the most recent ALJ decision held that a photographer was taxable on all associated labor charges, the court observed that the ALJ decision was not binding on the court and, in cases of doubt, tax statutes are to be construed in the taxpayer’s favor. The court concluded that it saw no difference between the services the taxpayer provided and the services in the earlier Alabama cases. Noting that stare decisis commands that it not overrule controlling precedent when not invited to do so, the court affirmed the trial court’s judgment. Please contact Scott Jackson at 404- 614-8688 with questions on Alabama Department of Revenue v. Omni Studio, LLC (April 29, 2016).

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.