I know there has been previous threads about this dreaded topic: Sales Tax!
I am in the US in Indiana. I work a full time job, and I have a small Etsy shop, but I also do very minimal freelance on the side. When I say minimal, I mean I have one small client. I know each state has their own rules and laws about this, so I know getting a straight answer is out of the question.
So, I have read that only certain services/products qualify for sales tax. Like, a tangible item gets taxed, but a design service wouldn’t. Which seems easy enough to understand, but what is considered a service? Etsy collects and remits sales tax for me, so I don’t have to worry about it there. But, my one client, it’s a teacher who sells digital lesson plans to other teachers in an Etsy type of store. The lesson plans and activities are old and out dated, so she sends them to me and I freshen them up and do layout work with them. Then, I send them back. In theory, it is/could be a tangible item, but I’m also providing a service. Where do you draw the line? Like logos as well. It’s not really a tangible item, but a service. But, if they print it on a product, does it become tangible. Or am I thinking way too much into it? Any insight would be great.
I quickly researched, and Indiana is one of those states where the sales tax laws are as clear as mud. The state has special rules regarding photography, electronic books, audiovisual materials (which they awkwardly define as a sequence of images with sound), but nowhere could I find graphic design mentioned.
Let’s assume Indiana doesn’t tax the sale of design services and only taxes the sale of tangible goods. You’d need to charge sales tax if you sold your teacher client a physical thing, such as printed lessons. If you only sold this person a digital file, since the digital file isn’t tangible, you wouldn’t charge sales tax on it.
Whether the teacher subsequently printed out what you sent would seem irrelevant. Whatever the teacher does with the digital files after buying them has nothing to do with the sale you made; it’s an after-the-sale use of the digital file.
I read on the state’s website that the state differentiates between digital files transferred electronically and digital files transferred on a physical medium. In other words, they might not expect sales tax to be paid on a design file emailed to a client or uploaded to a cloud service, but if you give them a DVD or a flash drive containing the files, you might need to charge sales tax since a physical object is involved.
As I said, Indiana’s sales tax laws seem like a mess.
Finally, I’m neither an attorney nor an accountant, so please don’t rely on my half-baked thoughts.
It would cost you far less than a tax fine to spend an hour with a small business tax consultant.
You could start with your state DOR small business website maybe (though often those are hard to navigate) or you could ask at your bank if they can recommend someone to help.
The sales tax situation is going to vary by state. What kind of guidance does your state provide? Here in California, they are very helpful. The state publishes a 65 page booklet explaining the sales tax implications for graphic designers and printers. And before you are allowed to sell you have to be interviewed by the tax dept so they can verify you understand everything. And they have free seminars throughout the year, and a hotline. Do you have anything like this in your state?
Thank you guys so much for your responses. Indiana is not very cut and dry for sure. But, my teacher client is located in Illinois, and does not tax digital goods, and since Indiana is a destination state (taxing where the buyer is) then that kind of solves that problem. I am in search of a CPA at the moment, but the one I wanted to go to has a waiting list unfortunately. Until I find one, I’ll just keep digging on Indiana’s website to see what I can find. I appreciate the help you guys have given! If we just got rid of sales tax, it would make things easier