On September 8, the Alabama Department of Revenue’s Administrative Law Division (the “ALD”) issued a ruling that will likely send shock waves to photographers across the state, and if not successfully appealed or if applied retroactively, could cause a financial hardship and a significant change in the way they do business. In Jaclyn L. Robinson d/b/a Robinson Studio & Design v. State Dep’t of Rev., Admin. Law Div., Dkt. No. S. 13-807 (Sep. 8, 2014), Chief Administrative Law Judge Bill Thompson concluded that all prepaid charges received by a wedding photographer, other than a separately stated “retainer,” were subject to Alabama sales tax, even though the photographer’s contract with her customers expressly stated that most of the fee was nonrefundable after a certain date, even if the photo shoot never took place.

The taxpayer is a full-service wedding photographer and photography studio in Mobile, Alabama, that offers various packages to customers. The parties enter into a contract identifying the event date, the type of package selected, and the total amount due. The contract also specifies whether the taxpayer will provide the customer with a disc containing the photographs, an album of selected photographs, a print credit that the customer may use to order printed photographs from the taxpayer, or any combination of the above. After the wedding, the taxpayer edits the photographs and then mails the disc, album, and/or printed photographs ordered by the customer to the in-state or out-of-state address provided by the customer. The customer and others can also order additional photographs from the taxpayer’s online gallery.

The total contract price includes a nonrefundable “retainer” required at the time of booking. The balance is to be paid in installments, although the taxpayer testified that some customers pay the full contract amount up front. The contract further specifies that there are no refunds. The taxpayer also testified, however, that if a customer cancels within four months of the wedding date, she refunds the contract amount that represents her charge for the tangible disc, album, and/or printed photographs that were not provided to the customer. Thus, for instance, if the contract price was $3,500, she stated that she would refund $500.

Upon audit, the Department of Revenue examiner included as taxable the entire prepaid contract amount, and all additional amounts for all discs, albums, and printed photographs sold by the taxpayer and mailed to a customer or other purchaser in Alabama. The taxpayer conceded that sales of the discs and photographs delivered to customers in Alabama were taxable, but she and her CPA asserted that she should not be taxed on most of her prepaid contract proceeds because those proceeds are not for the tangible items she sells to her customers, but rather are for her saving the wedding date on her calendar and declining other work.

Alabama sales and use tax law generally provides that the sale of photographs by a professional photographer constitutes a taxable sale of tangible personal property. At issue in this case, however, was whether the total amount received by a photographer should be divided into a taxable amount derived from the sale of the tangible discs, albums, and/or printed photographs, and a nontaxable amount derived from services provided by the photographer. The ALD had previously ruled that certain “consulting fees” charged by a photographer were not taxable because they were not for labor or services necessary to prepare, develop, or otherwise produce the photographs sold by the photographer. See Thigpen Photography v. State Dep’t of Rev., Admin. Law Div., Dkt. No., S. 95-127 (Aug. 30, 1995).

Ultimately, Judge Thompson distinguished his previous decision in Thigpen, and concluded that the prepaid fees charged by the taxpayer constituted taxable gross proceeds because they are for the taxpayer’s labor in planning, shooting, and editing the photographs, which are required and necessary steps in producing the finished, tangible products being sold by the taxpayer. However, Judge Thompson concluded that any retainer fee separately stated in the taxpayer’s contracts is unrelated to the production of the finished photographs, and is accordingly not taxable.

Recognizing that these contracts are often entered into well in advance of the wedding date, Judge Thompson then addressed when the tax is due, explaining that the taxpayer should charge and remit sales tax on the prepaid amounts as they are received. If the customer directs the taxpayer to deliver the photographs outside of Alabama, or if the wedding is cancelled, Judge Thompson explained that the customer would be due a refund of the sales tax erroneously paid. In those circumstances, the taxpayer and the customer could either file a joint refund petition, or the taxpayer could refund the tax to the customer and then claim a credit on the next monthly sales tax return. If the customer has an address outside of Alabama or the contract specifies that the photographs will be delivered outside of Alabama, Judge Thompson indicated that the taxpayer should not charge sales tax on what she expected to be a nontaxable sale. The Judge warned the taxpayer, however, that if the customer later directed the taxpayer to deliver the photographs to an Alabama address, Alabama sales tax would be due.

If ultimately upheld, this decision will represent a dramatic change for most wedding photographers doing business in Alabama. Indeed, during the hearing, the taxpayer testified that none of her competitors were collecting and remitting sales tax on their service charges, nor could the Department give her firm guidance in response to her questions. In light of this, Judge Thompson “encouraged” the Department of Revenue to notify all professional photographers in Alabama that they are liable for sales tax on all sitting and other fees they may charge when preparing photographs for sale. The Judge also suggested that the Department promulgate a regulation explaining how photographers should collect and remit sales tax. When the Department will act on either of those recommendations is unknown. However, photographers doing business in Alabama who have not been collecting and remitting state and local sales tax on their “service fees” should consider having their CPA or attorney contact the Department of Revenue (and the local jurisdictions in which they do business) to request participation in their voluntary disclosure program.

It is unknown whether the taxpayer plans to appeal this ruling to circuit court.