Tax time is NOW here in the United States! Yikes! That can send fear into the hearts of every small business owner.
This is a guest post from Marv Heston from HestonPhoto.com (all photos in the article are from Marv – no, they aren't tax related, but I wanted to show off his talents!) and he wants to tell you about his experiences with the tax man!
And the Tax Man Taketh Away.
Let me start by stating the obvious – State and Local governments are starved for money. The last 4 years of high unemployment and falling home prices and sales, and lower retail spending has left your state revenue department hungry for money… as much of it as they can get, from wherever they can get it. That means that they are a lot of Department of Revenue employees sitting around trying to figure out where they can get money.
A large portion of revenue for each state is Sales tax and Use Tax. Sales tax is the tax you pay when you go to your local camera store and buy something. Use tax is the ‘sales’ tax you are legally obligated to pay when the seller doesn’t charge you sales tax. Use Tax is sales tax for out of state purchases. So when you purchase a camera, tripod, memory card, even paper or ink from outside your state and the seller doesn’t collect sales tax, then you are legally obligated to pay that use tax next time you file your monthly/quarter tax returns.
But how does it impact me?
OK, that is the ground work for what you need to know, now for an example of how it can affect you.
I’ve been a professional photographer for a long time and a non-professional photographer for a lot longer. When I was just Joe Nobody shooting my own family pictures and vacations I bought equipment where it was cheapest, and in the old days that meant NY. I ordered everything from NY. After a while I ordered from NY, not always for the prices, but because they had things in stock that my local camera store didn’t carry. After 10+ years of ordering from NY I was set in my ways. By the time I turned Pro, the local camera stores were pretty much matching NY prices, but I kept ordering from NY, for the selection, the convenience, and the ease… I never gave it much thought as I had been doing it for 30+ years, as a consumer and then as a Pro.
Early last year I received a letter from the Washington state Department of Revenue informing me that I had been selected for an Audit. They proceeded to send me a detailed request for all my records, receipts, sales orders, local and federal tax returns, and accounting software for the past 5 years! (Forget everything the audit, just putting all this information together is a PIA.) The lady who was handling my audit was very sweet and as I handed all my documentation over to her I was pretty confident that I was clean, after all I had collected and paid my sales tax for all my local clients. For my out of state clients I had their billing information and locations of the job sites where I worked showing that I was working for them out of state, so I was feeling pretty confident.
However, after days turned into weeks and weeks into a month I began to wonder what was taking so long. I heard nothing except an occasional requesting addition information or clarification on items. I knew something was coming but I was not prepared for what came my way. When I was called back in for the results of my audit that same nice lady greeted me and took me to a side room where they keep the bright lights and rubber hoses. When she told me that I owed the state $7,349 in taxes, interest, and penalties, I was stunned. She explained that EVERYTHING that I had purchased from out of state I owed sales tax on, plus interest and penalties. She then proceeded to run down the list of items that I had acquired. She went down the list: cameras, lenses, scanners, paper, inkjet ink, competition prints, software… this list went on and on. Then she started to inquire about equipment I had sold! Had I sold it to someone in state? If so, then as a business I was responsible to collect and pay sales tax when selling my used equipment!
Now admittedly I’m a bit of an equipment junkie, I buy my cameras in 2s, that way if I’m on assignment and one fails I have an exact duplicate to finish the job with. But even with that it was hard for me to believe that I had bought and sold almost $55,000 worth of equipment over 5 years…but I had, the revenue department looks at everything. If you ordered glass cleaner and didn’t pay sales tax on it then be prepared to pay tax, interest, and a penalty on it.
Auditors are paid to find stuff, and their paycheck literally depends on finding stuff, so they are really darn good at it.
Now if you think that they won’t find you because you are a small business, think again, I was told that anybody who has a business license and isn’t paying Use tax is suspect and likely to get audited. So if you are buying things from outside your state and not paying Use tax, or if you are using your business to buy things locally and avoid sales tax you better make sure that everything you purchased goes into a product that you sell to clients and collect sales tax on.
Add to this, that some Pro photographers are fed up and are turning in their competitors and the part timers, semi-pros, and amateurs who are charging money and not collecting and paying Sales and Use tax.
If you are avoiding sales tax by buying out-of-state, or using your resale certificate to avoid sales tax for in-state purchases, or not charging your customers sales tax then you will likely end up in an audit.
If charging your customers sales tax, but failing to pay it to the state, you are at risk of doing some jail time on top of the taxes, interest, and penalties you owe. The state doesn’t like people who steal from the state.
Marv Heston is an award winning photographer based in Kirkland, WA and serving the greater Seattle region as well as destinations.Marv is best known for his Wedding Photography, but also works in Dance, Family and Individual Portraits, Seniors, Sports, and Commercial work.
(cover photo credit: snap from Marv Heston)