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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11178
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I work photography company that sells custom printed

Customer Question

I work for a photography company that sells custom printed products on-site for sporting events as well as online for those consumers who prefer to purchase after the event. The print media (paper & ink combination), folders we put the pictures in, even the software, specialty printers, and photography equipment we use to create the custom products all are a part of our manufacturing process which results in a custom product that is ultimately sold to the public. I've been told that the purchase of the equipment and supplies directly related to the manufacturing of these products is tax exempt. Is this correct? If so, are there any limitations to this provision? Our company has 5 locations: Dallas, TX; San Antonio, TX; Bronx, NY; San Francisco, CA; and Tuscaloosa,AL
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.
Hi. My mane is Eva and I will be happy to help you.
Yes, that's correct. Supplies are tax deductible, equipment that is expected to last more than one year has to be depreciated (usually deducted over several years).
How is your business structured? Are an employee (receive w2)? Sole proprietor, partnership, LLC or corporation? How the expenses are deducted depends on your classification.
If you are an employee, your deductions will be limited. You will have to Itemize your deduction and claim the expenses on form 2106 (employee business expenses). If you work as independent contractor (1099Misc), you will claim your income and expenses on schedule C and can deduct most of the expenses.
Customer: replied 1 year ago.
We are structured as an S-Corp, one owner at 100%. We use a tax accountant to file our annual franchise and income tax returns for all our locations and yes, we depreciate our equipment (purchases over $600) over 5 years. Is this correct? I would be happy to send you our 2013 TX return if that would help you.However, I process our sales tax in-house and not as familiar with this type of industry (NAICS: 541922) and wanting to make sure I educate myself before I hand out a Texas Sales and Use Tax Resale Certificate to one of our vendors claiming the items we're purchasing are tax exempt.Speaking of which, for our tax exempt purchases, I've always submitted our Texas Resale Certificate and yet wondered if since we have a nexus in three other states, should we submit a resale certificate from one of our nexus states when purchasing tax exempt products?Thank you for your help. It's greatly appreciated!
Expert:  emc011075 replied 1 year ago.
Ok. You are talking about sales tax, not income tax. Different area of expertise. Let me opt out and have another expert with more sale tax experience answer your question.
Please, do not respond until somebody answer, otherwise the system will not release the question to other experts to respond.
Expert:  Lane replied 1 year ago.
Hi,
First, sales tax is, as you know, a state specific issue.
And yes, in most states, (especially the way you have worded this), there is an exemption for manufacturing - manufacturing being defined in different ways by the different states - in their tax code (law).
States vary, however, in how the define this , and typically define in very specific detail - ALSO, most times, delineating what is NOT manufacturing.
The state who specifically disallow assembly of parts already existing, as manufacturing, may be the issue for you in some states.
(1) If you would, please (no personally identifying information) give me as much detail as you can about what the end product is and how your process works, and
(2) Give me a little time to dig into the tax code for each state please.
Should take me more that a couple of hours at most, once your provided the necessary detail.
Thanks
Lane
Customer: replied 1 year ago.
Hi Lane,Thank you for your help. What product are we manufacturing and selling? Great question. The easiest way to answer this is to give you an example.Have you ever been to an amusement park, ridden a wild ride, and upon exiting the ride been directed to an area where you could view a picture that had been candidly taken of you capturing your experience? Usually the images are posted on a monitor for you to view and which you are encouraged to purchase. And if one picture is great, then a package of 4 they explain would be better. And why do 4 of the same size? For a little more money, you could get a variety package that captures your experience in 3 different sizes in addition to a matted frame which would help preserve your memory for a lifetime.If you have ever experienced this type of promotion, then you have a pretty good idea of the foundation of our business. The business was created back 28 years ago with the goal of taking that type of technology and instead of limiting it to a permanent installation type setup, making it mobile. Which means, we can capture any event you want, any location you want, and print the product right there on site for your enjoyment. This idea caught on and the business grew fast which grew into what it is today - 50% of the business focused on professional sports teams the other 50% focused on corporate meetings.In the sporting arena, we have photographers that roam the stands throughout the game taking pictures of patrons enjoying their experience. The customer is handed a card that directs them to visit a particular booth to view their photo. When they do, just like with the amusement park, they are offered a variety of options and packages to choose from. They order their package, we print their product right there on site in front of them, and they go on their merry way. See attached image "08271978.jpg".In the corporate arena, it's the same idea, just not nearly as exciting. We mainly get requests from large corporations to come photograph their annual meeting, company anniversaries, retirement parties, etc. We use a green screen format where the employees stand in a particular area in front of a literal green screen, we shoot them with traditional studio lights and cameras, etc. See attached image "greenscreen.jpg". The client can either choose to have the photos printed right there on site if they want, but many times corporate customers want them mailed to their corporate office, and usually they want the digital image in addition to the printed product. See attached image "1 Contact Sheets.pdf".OK, having said all that, as you might imagine, there are a large number of expenses that go into providing the customer with their final product. From the photography equipment and lighting and computers we use to generate the photo all the way down to the paper we print them on, the folders we put the pictures in, the bags we give the customers to carry their product, the jump drive we sell with their digital image. The question of what is taxable and what isn't is complex to us on the equipment side of things more than anything. I realize that the jump drives we purchase to turn around and resale with their digital image uploaded on is tax exempt as it is resold and tax is collected from the consumer. But what about the equipment to generate that image? Or the computers and printers that generate that print? Or the software on the computer that we have to have to print on our specialty printers? That is where I'm needing further help.Our company has 5 locations and we provide both sports and photography services in each: Dallas, TX; San Antonio, TX; Bronx, NY (nexus); San Francisco, CA (nexus); and Tuscaloosa,AL (nexus)Any help you can offer is greatly appreciated!
Expert:  Lane replied 1 year ago.
Thanks for the clarification.So you're not asking aout the sales tax on what you SELL, you're asking about paying sales tax on the equipment you purchase, i.e., "But what about the equipment to generate that image? Or the computers and printers that generate that print? Or the software on the computer that we have to have to print on our specialty printers?"The task, as it relates to the product you sell to corporations is whether this process cold be described as manufacturing or not ..Note how Texas Puts it:"State sales and use tax exemptions are available to taxpayers who manufacture, fabricate or process tangible personal property for sale.Texas sales and use tax exempts tangible personal property that becomes an ingredient or component of an item manufactured for sale, as well as taxable services performed on a manufactured product to make it more marketable.The exemption also applies to tangible personal property that makes a chemical or physical change in the product being manufactured and is necessary and essential in the manufacturing process. Some items, such as hand tools, are excluded from the exemption. A hammer, for example, is taxable even if it is used in fabricating a product for sale."
Expert:  Lane replied 1 year ago.
Now, note what they say ISN'T manufacturing (isn't exempt):
Expert:  Lane replied 1 year ago.
Non-qualifying machinery, equipment, supplies and laborThe following items do not qualify for the manufacturing exemption or refund:office equipment and supplies;equipment and supplies used in sales and distribution activities;machinery or equipment used to maintain or store the product;
Expert:  Lane replied 1 year ago.
There are more, but I have to wonder whether some of these things end up relating Very Closely to your process
Expert:  Lane replied 1 year ago.
Long story short ... Probably the most efficient and accurate way to deal with this is to call each of the sales tax units at each of the four states... I can do that for you, but would need to make an additional services offer so that we can exchange information in the appropriate confidential manner (the site here has a way to do this, where I make an offer, you accept, - I'll make for a nominal amount - and then an encrypted channel opens up where we can exchange contact info)I think that the right way to do this is to let me do the reaearch, and write this up for you with the reactions from each of the four sales tax departments and the related tax code.