Help with Dealing wth Dept. of Revenue

greenpea

Hey, I posed this question before (here) but the Washington State Department of Revenue is still having issues understanding how the whole smugmug thing works. I figured I should post this, because I am sure if I am having issues with this, some one else either is or will be having issues.

I need to understand how does the flow of revenue works. When a client buys a photo, is smugmug recording the topline revenue for the purchase of the picture?

In other words, when a customer buys a photograph from Smugmug, who is recognizing the full amount of the revenue? Is it Smugmug?

The payment that goes back to me as the Smugmug professional account holder (85% of the net profit) what does that represent? I own the photograph, am I licensing the photo to Smugmug to sell the photograph?

My partner in the Initial Photography business is a business banker, he is the guy that deals with the Dept. of Revenue and IRS and all of that (I deal with the tech stuff). He says in order to be able to explain this to the lady from the Department of Revenue he needs to be able to "clearly map out the flow of revenue".

Andy

greenpea wrote:

Hey, I posed this question before (here) but the Washington State Department of Revenue is still having issues understanding how the whole smugmug thing works. I figured I should post this, because I am sure if I am having issues with this, some one else either is or will be having issues.

I need to understand how does the flow of revenue works. When a client buys a photo, is smugmug recording the topline revenue for the purchase of the picture?

In other words, when a customer buys a photograph from Smugmug, who is recognizing the full amount of the revenue? Is it Smugmug?

The payment that goes back to me as the Smugmug professional account holder (85% of the net profit) what does that represent? I own the photograph, am I licensing the photo to Smugmug to sell the photograph?

My partner in the Initial Photography business is a business banker, he is the guy that deals with the Dept. of Revenue and IRS and all of that (I deal with the tech stuff). He says in order to be able to explain this to the lady from the Department of Revenue he needs to be able to "clearly map out the flow of revenue".

Hi Greenpea,

Because it is an online sale that technically takes place in California, we charge sales taxes on any California purchase. It is up to the customer to declare taxes themselves according to their own state regulations. Sales taxes on Internet purchases are only required to be charged by the seller on purchases in states where the seller has a physical presence. Since we collect the credit card information, we are considered to be the seller. And presently, we collect sales taxes from buyers who are in the State of California.

You will get a 1099 from SmugMug that will list all income (money we pay you). We'll of course also submit this 1099 to the IRS, as we are required to do.

Clear as mud? Holler if you need more.

greenpea

Andy wrote:

Hi Greenpea,

Because it is an online sale that technically takes place in California, we charge sales taxes on any California purchase. It is up to the customer to declare taxes themselves according to their own state regulations. Sales taxes on Internet purchases are only required to be charged by the seller on purchases in states where the seller has a physical presence. Since we collect the credit card information, we are considered to be the seller. And presently, we collect sales taxes from buyers who are in the State of California.

You will get a 1099 from SmugMug that will list all income (money we pay you). We'll of course also submit this 1099 to the IRS, as we are required to do.

Clear as mud? Holler if you need more.

So for accounting purposes is Initial Photography a contract employee of Smugmug?

From an accounting basis, is the customer buying the image from Initial Photography or Smugmug, and if the customer is buying the image from Smugmug how (again from an accounting basis) is Smugmug paying us? (i.e. is it a commision? and if its a comission, does that mean we are licensing the photo to Smugmug?)

System

It would seem to me that smugmug is playing the role of a "fullfilment house" as is common in almost all catalog or online retail operations. The fullfilment house handles the order processing, credit card clearing, warehousing of merchandise as well as shipment of goods sold. You are in essence paying smugmug a fee to handle those services just as smugmug then contracts out to ez-prints.

greenpea

truth wrote:

It would seem to me that smugmug is playing the role of a "fullfilment house" as is common in almost all catalog or online retail operations. The fullfilment house handles the order processing, credit card clearing, warehousing of merchandise as well as shipment of goods sold. You are in essence paying smugmug a fee to handle those services just as smugmug then contracts out to ez-prints.

All of this started when Initial Photography filed for a business licenese in the State of Washington. A person from the Washington Department of Revenue contacted us and wanted to understand how we were dealing with Washington State sales tax. The explaination that we sold our images through Smugmug, and that Smugmug is based in California, and that Smugmug and handled all credit card transactions and and took care of California sales tax didn't seem to be enough for her. Don't get me wrong, this lady with the Department of Revenue has been very helpful, she just doesn't seem to fully understand the how the flow of revenue works.

System

Did you use a CPA to set the business? Is it an LLC, subchapter S or what not? Either way ya might want to run it by a WA accuntant or tax attorney to be sure.

Andy

greenpea wrote:

So for accounting purposes is Initial Photography a contract employee of Smugmug?

From an accounting basis, is the customer buying the image from Initial Photography or Smugmug, and if the customer is buying the image from Smugmug how (again from an accounting basis) is Smugmug paying us? (i.e. is it a commision? and if its a comission, does that mean we are licensing the photo to Smugmug?)

The customer is buying from SmugMug, and SmugMug is collecting the sales taxes (if any apply) and remitting said sales taxes to the proper taxing authority.

SmugMug pays you, pro profits, and those pro profits are reported to the US government in the form of a 1099.

Seefutlung

Sales tax are local. The sales take place in California ... and Smugmug charges a State of California Sales Tax on those customers where that tax applies. You are given a check from Smugmug which represents income ... you are responsible for paying an income tax on that (after expenses). As no sales occur in Washington ... Washington does not deserve to enjoy any benefit from those "sales" taxes. If a Washington based manufacturer of ... say ... Camel Saddles sells 100% of its wares in Arabia does the State of Washington deserve any "sales" tax from those sales? Of course not. Same-O in your situation.

I bet she's trying to say that sales have occurred and that no matter what, a sales tax needs/should to be applied by someone deserving of that tax. California is first in line as the sales occur there. Since the biz operates from Washington, Washington deserves to tax all sales not taxed by California. Interesting ... I'm not a tax expert ... but there has to be some sort of tax code addressing this matter (a la Camel Saddle Sales). She is probably getting confused due to the high tech nature of "internet" sales.

Sales tax get paid before expenses, whereas income tax gets paid after expenses.

mmroden

I believe that a 1099 means that you're being paid as a consultant, not as a company. The payment goes to you as an individual, not to a company, even if you're incorporated.

From http://en.wikipedia.org/wiki/Form_1099:

A notable use of Form 1099 is to report amounts paid to independent contractors (in IRS terminology, such payments are nonemployee compensation). The ubiquity of the form has also led to use of the phrase "1099" to refer to contractors themselves. U.S. tax law requires businesses to submit a Form 1099 for every contractor paid more than $600 dollars for services during a year. This requirement usually does not apply to corporations receiving payments. (emphasis mine)


So you might be going about this all wrong as an attempt to set Smugmug up as a revenue stream for a company, unless you can pull some accounting gymnastics to convert the income reported on a 1099 to something that becomes revenue for your company.

dragon300zx

You are not an employee of smugmug, and you are not selling the photograph.

What she needs to understand is you are an artist, you have a gallery in another state that sells your product for you. They do all of your retail sales and you do no retail sales. They provide you with your commision of the sale as the artist. They 1099 to keep track of the commision that is paid to you. You do not do sales, you do not deal with the clients, you do not take payment information. You are a self employed artist who recieves a statement of untaxed income from your gallery. But you do not do retail sales.

Angelo

dragon300zx wrote:

You are not an employee of smugmug, and you are not selling the photograph.

What she needs to understand is you are an artist, you have a gallery in another state that sells your product for you. They do all of your retail sales and you do no retail sales. They provide you with your commision of the sale as the artist. They 1099 to keep track of the commision that is paid to you. You do not do sales, you do not deal with the clients, you do not take payment information. You are a self employed artist who recieves a statement of untaxed income from your gallery. But you do not do retail sales.

EXACTLY!!!

Yea Dragon!

greenpea

Thanks everyone for the help! Hopefully the next conversation with the lady at the Dept. of Revenue will go better.

Personally I've always felt like I understood how the system works; it was that I didn't know how to explain it all in accountant terminology (I have the same problem when I'm trying to explain technology or photography to someone )

And out of curiosity, has anyone else had this many problems? I don't think Smugmug requires a business license, do others go through the trouble of getting a state or city business license?

Again, thanks everyone.

dragon300zx

greenpea wrote:

Thanks everyone for the help! Hopefully the next conversation with the lady at the Dept. of Revenue will go better.

Personally I've always felt like I understood how the system works; it was that I didn't know how to explain it all in accountant terminology (I have the same problem when I'm trying to explain technology or photography to someone )

And out of curiosity, has anyone else had this many problems? I don't think Smugmug requires a business license, do others go through the trouble of getting a state or city business license?

Again, thanks everyone.

I have my LLC registered for a couple reasons, the tax breaks, and to limit my liability of course.

I think why it's so complicated in your situation is the person at the dept of revenue. Seems like she is either completely clueless or trying to trip you up and get you to say something wrong so she can get more money out of you. They are tax people after all which puts them at about the same level as a leech.

I know for a fact in michigan at least that sales tax is sales tax. Whichs means unless I am doing the retail sales I don't have to collect tax (a great benifit of using galleries or services like smugmug).