#989644 - 06/30/04 03:55 PM
CA state sales tax alert!
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bdbklyn
Platinum Member
Registered: 04/04/01
Posts: 1035
Loc: Los Angeles,CA,UNITED STATES
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I have been recently contacted by several people regarding California state sals tax issues.
There are quite a few studios (both large and small)in the Los Angeles area being audited by the California State Board of Equalization.
Most of these smaller operations have always been "below the radar" of the auditors, however;
they in many cases are now on the radar screen as vendors who are being audited have had to supply to the Board of Equalization their list of customers.
A little background. In 1998 a California law was passed providing a reduction of sales tax paid on equipment used in post production. Instead of 8.5%, they would pay 3% sales tax.
The intention was to try and keep postproduction for film, video, and computer games in California. A vast amount of which was moving to Canada. You could qualify for this tax reduction by having "post production" being 51% of your business.
The way this law is written, it could be argued that a compact disc is indeed an interactive medium. Also, that post production work is defined as any work running with time code. The law specifically defines and excludes music production.
At the time many of us felt the law was unfair. After all, equipment for recording studios were pretty high ticket items and business was going away just a quickly or quicker than it was for "post production".
As a result of this law , many vendors were offering all their customers the option of paying 3% sale tax as oppsosed to 8.5% without requiring the State's "post production" tax resale certificate.
This audit could be very painfull to a lot of people. For instance, say you bought an large format recording console in 1998 for$600,000. If you took the deduction, your sales tax would be $18,000 as opposed to $49,500. Not too many people were asking if they could pay $31,500 more at the time of the sale.
I always felt that a good tax attorney could argue that you indeed did qualify for the exemption, however; good tax attorneys cost big bucks and a representative from the State has said that it doesn't matter whether you qualify or not. What does matter is that you did not have a valid "post production" cetificate at the time of the transaction.
Remember the rule is that as a re-seller, you do not charge tax, you COLLECT it!
To qualify as a reseller you must you must apply for a resale certificate. If you are in the studio business, you must charge sales tax on all materials putchased by the client. You do not charge sales tax on services or time, only material goods. When you purchase the material good for re-sale, you provide your vendor with your re-sale certificate and you will not pay that vendor sales tax. The concept is, that materials are taxed once and the final buyer is taxed.
In New York, the law is different. You must charge sales tax on studio time and materials. Their resale certificate does allow you not to pay sales tax on goods that you purchase to resell or any other equipment that you purchase to perform the services that you provide.
I'm sure that many people think that they are OK with buying materials, paying the apropriate sales taxes, then either re-selling them to a client, (marked up of course) or not charging for them in an effort to make things simpler. If you are audited, you will be responsible for the difference in sales tax between what you paid for the product and what you sold it for. Also if you include the materials in your fees and don't carry them as a line item on your invoices you could be liable for the current 8.25% on both time and materials.
Also...we need to talk about out of state purchases. You are required to pay a use tax if you buy something out of state and do not pay sales tax on the item and don't use it for resale. The rate of this use tax coincidentally is the same as sales tax.....
As I have learned personally, (the hard way too!) the IRS is a walk in the park compared with the California State board of Equalization.
Get your house in order...
Bill
_________________________
Studio Guru
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#989645 - 06/30/04 10:26 PM
Re: CA state sales tax alert!
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joel@studiosuite.com
Senior Member
Registered: 12/17/00
Posts: 41
Loc: Marietta,GA,UNITED STATES
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Right you are, Bill. Another pecularity is that if your client is based in a different county that you (say Orange instead of Los Angeles) and you SHIP them the tapes/discs (instead of them walking out the door with them), you are supposed to charge them the tax rate of the county you ship them to. Orange is 7.75 BTW.
When I was developing Studio Suite I went to great lengths to make it flexible enough to accomodate the bizare tax requirements of all the states and countries in the world, but I'm constantly surprised at how many of my customers aren't using this important and great feature I laboriously put in!
So this is a plug for Studio Suite . It will cover your @ss more ways than you can count!
Speaking of Studio Suite, please see the "Studio Suite spans 40 Countries" press release in another topic in this forum!.
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