Mississippi Supreme Court Rules That Digital Photos are Exempt from Sales Tax

The Mississippi Supreme Court (Court) has affirmed a lower court’s decision, ruling that a wedding photographer was not liable for a sales tax assessment issued by the Mississippi Department of Revenue (DOR). The DOR had issued a sales tax assessment under audit, claiming that the photographer’s customers were not engaging the photographer’s services, but rather were buying photographs delivered via the tangible form of a jump drive, DVD, coffee table book, etc. Since personal property was included, the entire package sold by the photographer was subject to sales tax, per the DOR.

The Court stated that the photographer provides photography services and sells the copyrights to the digital still images that he creates, neither of which is subject to sales tax. Photography is not a taxable service in Mississippi. Film development and photo finishing are taxable in the state. However, the photographer is an exclusively digital photographer. He does not use film, develop film or engage in photo finishing (developing and printing photographs from negatives). Still digital images are not taxable digital products in Mississippi.

The photographer would take photos, adjust and crop the images on a computer, and upload the images to a jump drive or DVD and send it to the customer. If the customer’s package included a coffee table book, the photographer would engage a third-party service provider to construct the book. The photographer would pay sales tax on the DVDs, jump drives, coffee table books, etc. when he purchased them for his customers.

The DOR contended that there is no difference between customers receiving one thousand physically printed photos and customers receiving one thousand digital photos contained on a DVD or jump drive. The Court disagreed with the DOR’s opinion that the wedding photography contracts were for the sale of tangible personal property. The Court stated that the photographer’s customers did not pay him thousands of dollars for a jump drive or DVD that could be purchased at an office supply store for a few dollars. The customers paid him to take digital photographs of their wedding. Further, the customers did not receive photographs in tangible form, such as photographs, negatives, or film. Rather, they received purely digital images. The tangible jump drive or DVD is incidental to the nontaxable photography service being provided.

The Court emphasized that the sale of still digital images is not subject to sales tax since still digital images are absent from the definition of taxable “specified digital products.”

The DOR argued that the photographer engaged in the taxable business activity of “photo finishing” when he edited the digital images. The DOR referenced an online-dictionary definition of “photo finishing.” However, the definition pertains to the use of film and the photographer does not use film. The DOR argued that the meaning of photo finishing has evolved to include the touching up of digital photos. The Court stated that the Legislature has given no indication that digital editing services are to be including in “photo finishing.”

The DOR additionally argued that its tax assessment was prima facie correct since the photographer failed to maintain proper records to allow the DOR to determine the correct amount of tax due. The Court stated that the record-keeping duty applies to taxable persons. Since the DOR failed to establish that the photographer engaged in a taxable activity, the assessment was properly not accepted as prima facie correct. (Mississippi Department of Revenue v. EKB Inc. et al., case number 2021-SA-00441, Mississippi Supreme Court, affirmed October 6, 2022)

Posted on October 11, 2022