Sales and use tax for artists can be very tricky. It’s an area of small businesses that can have a big learning curve when you are first starting out. This week’s blog post covers some sales and use tax basics for artists and creative small businesses.
Disclaimer: This content is not financial or tax advice, these are tips that I am openly sharing as I have learned (and continue to learn) this area of my business. Always refer to a certified tax accountant to help you specifically with your business and your taxes. Also note that sales and use tax rates and laws will differ state-to-state, and because my business is located in Minnesota, this blog post will be coming from that lens.
Sales Tax
When you sell an item to a customer, you must collect sales tax on behalf of the government. In addition to selling your artwork (or product), digital products and services can be subject to sales tax. It is your responsibility to learn what products are subject to sales tax.
Sales tax must be collected and paid to the government, this is not business income. Frequently small businesses or customers buying artwork make the mistake of thinking the sales tax laws don’t apply to art sales. Every time you sell an item that is applicable to tax, charge the tax to the customer and collect it.
Negotiating Sales Tax
If you sell a product to an art collector and negotiate the price, sales tax may be part of that negotiation conversation. This has happened to me when I have worked with galleries. The gallery negotiated to remove the sales tax from the total and the buyer agreed to buy two paintings. Regardless of charging the customer the tax, that amount is still due whether the customer pays it or not. If sales tax becomes a negotiation point during a sale, you will be required to cover the cost of the sales tax. When working with a gallery or third party, you will need to get clear on who owes that tax.
Determining Your Tax Rates
Sales tax is determined by the state, but cities and counties may have additional tax applicable to your location. Do not forget to research and see what taxes are applicable to you. Where your business is located determines your rate.
If I live in one city, but happen to drive an hour away and participate in an art fair or marketplace event, I need to charge sales tax based on the location of the event.
Buying Supplies Tax Free
As a business who is making product or creating artwork, you can buy your supplies tax-free. You have a tax exemption because you will be making a product that you will then sell and collect tax for.
Not all items or supplies are able to be tax-free, however much of your art-making (or product producing) supplies will be. You will need to obtain a tax identification number and know the forms you need to present to manufacturers and stores so they won’t charge sales tax. (In Minnesota, this is the ST-3 form). It’s your responsibility to know what you can and cannot buy through the tax exemption. You also are in charge of presenting the proper documents to manufacturers and stores when buying the exempt supplies.
Use Tax
Use tax is similar to sales tax but think of it as using an item for your business that you are no longer able to sell to a customer. For example, if I jewelry and I wear a piece of jewelry at every art event as a display, I am using that item. I wouldn’t sell it to a customer because it’s no longer new, it will eventually have some wear, and I plan to continue wearing it at future events. Because I won’t sell it to a customer, sales tax won’t apply, however, I need to pay use tax on the item.
Tax Thresholds
There are different sales and use tax thresholds that you hit before your deadline for sales and use taxes change. For many small businesses you will submit and pay this tax annually. (Here in Minnesota, this is in February). However, if my business suddenly grows this year and I am collecting many more sales taxable transactions, I may hit the next threshold where the state will require me to pay sales tax quarterly or even monthly.
Exemptions
States have sales tax exemptions that are applicable to large categories of products. The most noteworthy in Minnesota is that there is no tax on clothing. Take inventory of the items you sell and research if tax is applicable to your product categories.
Customers who purchase from you may have exemption status. If a customer presents sales tax exemption documentation (In Minnesota this would be a Tax ID number most likely on an ST-3 form) then you do not charge sales tax on the sale. When you have a tax-exempt customer, request a copy of their tax exemption documents in your sales files.
Training
Teaching yourself about business taxable sales is your responsibility as a business owner. If you leave your bookkeeping, sales tax, and other financial duties until the end of the year, you are going to be scrambling and stressed out. Actively manage your financial tasks month-to-month and commit to actively learning about the taxation laws.
Some states will provide you with training on sales and use tax. Reach out to your Secretary of State to determine what workshops, info-sheets, training, and resources you have to continue to learn how to manage your sales taxes.
Sunlight Tax is a great resource for artists who want to learn about small business taxes from a certified tax accountant who is an artist (and works with other creatives).
Do you have any additional tax books, webinars or resources for artists and small businesses? Comment below with your recommendations.