Wedding Photographer’s Sale of Digital Photos on Flash Drive Not Subject to Mississippi Sales Tax

By: Camille Gregory, SALT Senior Associate

At a glance

• The main takeaway: The Mississippi Supreme Court concluded that a wedding photographer provided nontaxable services even when their customers received digital photos on a flash drive.
• Assess the impact: The ruling by the Court is a subjective analysis, meaning that two states may come to a different conclusion regarding similar transactions, which increases the nuances and complexities of sales tax compliance and administration.
• Take the next step: Aprio’s State and Local Tax (SALT) team has experience identifying and analyzing these issues and can help your business remain in compliance with its sales and use tax obligations.

Schedule a free consultation today to learn more!

The full story:

The Mississippi Supreme Court (Court) issued a decision in which it ruled that a wedding photographer was not subject to sales tax for providing digital photography packages to customers.[1]

Take a closer look at the case

The taxpayer, EKB Inc. (EKB), provides wedding photography services. Wedding contracts include the transfer of digital images on a DVD or flash drive, and the customer typically purchases the copyright to the images. After a wedding, the digital photos are adjusted and cropped on a computer and delivered to customers on a flash drive, DVD, or coffee-table book. Coffee-table books are constructed by a third-party print service, but EKB selects images for the book. The company paid sales tax on the purchase of flash drives, DVDs, coffee-table books and other supplies used to provide its photography services.

The Department of Revenue (DOR) audited EKB claiming that the company’s wedding packages are taxable sales of tangible personal property. Specifically, the customers were not purchasing photography services, but were buying photographs delivered in the tangible form of a flash drive, DVD, or coffee-table book. The DOR’s view was that because tangible personal property was included, the entire wedding package sold by the photographer was subject to sales tax.

Mississippi taxes the gross retail sales of all persons in the business of selling tangible personal property.[2] Furthermore, like most states, Mississippi generally does not tax services other than those specifically listed as taxable. Photography services are not listed as a taxable service.[3]

The ruling explained

The court rejected the DOR’s reasoning that the photographs were taxable tangible personal property because EKB’s customers did not receive wedding photographs in tangible form, such as printed photographs, negatives, or film. Rather, customers received digital images, and the tangible flash drive or disk was incidental to the nontaxable photography service. The Court compared the sale of digital images on a flash drive to a lawyer delivering its client a will printed on paper. The client is not purchasing the paper but is instead purchasing a nontaxable professional legal service. Similarly, EKB’s customers are not purchasing the flash drive but are instead purchasing a nontaxable photography service.

The Court also confirmed that the digital images EKB produced are not classified as taxable specified digital products.[4] Mississippi defines specified digital products as electronically transferred digital audio-visual works such as a motion picture with sound or digital books. The definition does not include still digital images. The Court concluded that EKB was not required to collect sales tax on these wedding packages.

This case highlights a few interesting points worth noting:

• First, the Court’s analysis may sometimes be referred to as “true object test,”[5] and is commonly applied when a transaction involves both a service and tangible personal property (or two services, one of which is taxable) where the two really can’t be separated. It is a subjective analysis, meaning that two states may come to a different conclusion regarding similar transactions.
• Second, while the Court in this case did not appear influenced by the method of delivery, we know that for software, the medium through which the software is delivered (e.g., flash drive, electronically, or SaaS) will directly impact the taxability.
• Finally, the taxation of digital products is not uniform among all states. Some states don’t tax digital products at all, while those that do may have different rules regarding what types of digital products are taxable.

The bottom line

This illustrates some of the nuances and complexities that we see across states regarding the imposition of sales tax on products and services. Aprio’s SALT team has experience identifying and analyzing these issues, and we can help your business remain in compliance with its sales and use tax obligations so that it does not incur unexpected tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Camille Gregory, SALT Senior Associate, at camille.gregory@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the December 2022 SALT newsletter.

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[1] Mississippi Department of Revenue v. EKB, Inc., Miss., No. 2021-SA-00441-SCT, October 6, 2022.

[2] Miss. Code Ann. § 27-65-17(1)(a)

[3] Miss. Code Ann. § 27-65-23

[4] Miss. Code Ann. § 27-65-26(3)

[5] It may be referred to differently by other states. For example, Texas often refers to this as the “essence of the transaction” test.

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.