How Do Music Studios Pay Sales Tax?
Small companies have great flexibility to structure music studios as sole proprietorships, partnerships and various types of corporations. The structure you choose is but one of a number of factors that influence your sales tax procedures. Your location is important, as sales taxes vary greatly by state and municipality. Upfront planning can help you minimize your sales tax burden. You can make informed decisions by understanding how sales taxes specifically apply to music studios in your state.
U.S. businesses normally must collect a sales tax on the products they sell and the services they render. A music studio often sells services such as recording, rehearsing, mixing and packaging. They might also sell media such as CDs. The sales tax you collect will depend on the city and state where you operate. Some states, such as Oregon and Montana, charge no sales tax. Other states have high sales taxes. For example, California charges 7.5 percent in sales taxes at the state level, while San Francisco adds a 1.25 percent city sales tax.
You first must choose an organizational structure for your music studio. If you are the sole owner, a proprietorship might work well. If you have two or more owners, you must carefully study the pros and cons of partnerships, regular corporations, limited liability corporations and subchapter "S" corporations. In some structures, taxes are charged on the business entity, while in others, the owners pay taxes directly. Once organized, you will need to procure the required state and municipal licenses to run your business and facilitate the payment of sales tax. As a sole proprietor, you can use your own Social Security number or a separate Federal Taxpayer ID when remitting sales tax.
Most states have no special rules pertaining to the sales tax on the equipment you purchase to set up your music studio. However, under Texas Tax Code Section 151.318, equipment you purchase or rent to make studio recordings is exempt from the state’s 6.25 percent sales tax, as well as any municipal taxes within the state. Florida exempts the sales tax that music studios must pay on the purchase of equipment to produce master recordings. The safest course of action is to contact your state’s tax authorities to learn how sales taxes apply to purchases on behalf of your music studio.
State laws dictate the products and services upon which your state collects sales tax. Unless you live in a sales-tax-free state, you can safely assume that you will need to collect sales tax on the sale of media, including master tapes, CDs and audio DVDs. However, sales taxes on services rendered by music studios vary by state. You might run into a situation in which you charge no sales tax when you rent out studio recording time, but must charge sales tax if you create and sell CD copies of the results of a recording session.
When you collect sales tax, you must keep complete records of all sales, hold the collected taxes aside from your own money and not use any of the tax proceeds for your own use. States vary on the frequency they mandate for remitting sales taxes. For example, Nebraska requires you to remit monthly if your annual sales tax liability is at least $3,000, but requires only an annual remittance if your liability is under $900. Other states allow you to select a payment schedule that works best for you.
If your studio sells digital downloads of music, you might be obliged to collect sales taxes on these sales. Vermont, Washington, Wisconsin and several other states have explicit laws mandating sales tax collection on downloaded or digitally-prepared recordings. Other states rely on their general tax laws to define the sales tax on downloads. On the other hand, North Dakota specifically exempts certain digital products from taxation. Your state tax authorities can clarify the rules that apply to your situation.