Miss. Dep't of Revenue v. EKB, Inc.
| Decision Date | 06 October 2022 |
| Docket Number | 2021-SA-00441-SCT |
| Citation | 348 So.3d 968 |
| Parties | MISSISSIPPI DEPARTMENT OF REVENUE v. EKB, INC., Scott Burton and Emily Burton |
| Court | Mississippi Supreme Court |
ATTORNEYS FOR APPELLANT: JUSTIN PERRY WARREN, BRIDGETTE TRENETTE THOMAS, MORTON WARD SMITH, Ridgeland
ATTORNEYS FOR APPELLEES: HARRIS H. BARNES III, JAMES WILLIAMS JANOUSH, Flowood
BEFORE KITCHENS, P.J., MAXWELL AND CHAMBERLIN, JJ.
MAXWELL, JUSTICE, FOR THE COURT:
¶1. Following a 2020 audit, the Mississippi Department of Revenue (MDOR) issued a $65,957 sales tax assessment against EKB, Inc., a wedding photography business owned and operated by Scott Burton.1 The problem with this is that sales tax applies only to the sale of "tangible personal property." Miss. Code Ann. § 27-65-17(1)(a) (Rev. 2017) (emphasis added). And EKB does not sell tangible personal property.
¶2. EKB provides Burton's photography services and sells the copyrights to the digital still images he creates. Neither activity is subject to sales tax.
¶3. First, photography is not a taxable business activity. See Miss. Code Ann. § 27-65-23 (Rev. 2017). Film development and photo finishing, however, are taxable business activities. Id. But as an exclusively digital photographer, Burton does not even use film, let alone develop film or engage in photo finishing—i.e., the process of developing and printing photographs from negatives.
¶4. Second, still digital images are not taxable digital products. In addition to the sale of tangible personal property, the sale of "specified digital products" is subject to a 7 percent tax. Miss. Code Ann. § 27-65-26(1) (Rev. 2017); Miss. Code Ann. § 27-67-3(e) (Rev. 2017). But still digital images do not fall under the definition of specified digital products. Miss. Code Ann. § 27-65-26(3)(a)-(c) (Rev. 2017).
¶5. Because EKB did not engage in taxable sales, this Court affirms the chancery court's order vacating the MDOR's sales tax assessment.
Background Facts & Procedural History
¶6. To engage Burton's wedding photography services, clients contracted for one of EKB's packages. These packages ranged from $2,500 to $11,000. Every package included the transfer of digital images via a DVD or flash drive. In almost all packages, the client purchased the copyrights to the images Burton created.
Additional package options included an engagement photo session and a slide show of images played at the wedding reception. Higher-end packages also included linen prints and/or a coffee-table book of the wedding photos. As far as Burton could recall, only two clients had ever purchased the most expensive package, which included an iPad onto which digital images were downloaded.
¶7. To purchase a package, clients would enter into a contract and pay a deposit. The balance was then due before the wedding. After the wedding, Burton would use his computer to adjust and crop the images. He then uploaded the images to a jump drive or DVD and sent them to the client. If the client's package included a coffee-table book, the client would select the images for the book, and Burton would engage a third-party print service to construct the book. According to Burton, EKB paid the sales tax on the DVDs, flash drives, coffee-table books, iPads, and digital frames when he purchased them for his clients.
¶8. In 2016, the MDOR audited EKB and Scott and Emily Burton. Following the audit, the MDOR issued a sales tax assessment of $65,957 for the tax period of January 1, 2012, to January 31, 2014.
¶9. EKB appealed to the Board of Review, which affirmed the sales tax assessment. EKB then further appealed to the Mississippi Board of Tax Appeals, which, following a hearing, also affirmed. Specifically, the Board of Tax Appeals found EKB was in the business of selling tangible personal property and thus was subject to sales tax under Section 27-65-17.
¶10. EKB appealed the sales tax assessment to the Lafayette County Chancery Court. After a bench trial, the court vacated the sales tax assessment. Specifically, the chancellor concluded that capturing and selling digital images was neither the sale of tangible personal property under Section 27-65-17 nor a listed taxable business activity under Section 27-65-23. The chancellor further found EKB's use of DVDs, flash drives, and digital tablets did not amount to the sale of tangible personal property. Thus, the chancellor ruled, the MDOR exceeded its statutory authority when it assessed EKB sales tax.
¶11. The MDOR then appealed to this Court.
Standard of Review
¶12. Recently, "[i]n King v. Mississippi Military Department , this Court abandoned its ‘old standard of review giving deference to agency interpretations of statutes’ and established that we now will conduct a de novo review without giving such deference." HWCC-Tunica, Inc. v. Miss. Dep't of Revenue , 296 So. 3d 668, 673 (Miss. 2020) (quoting King v. Miss. Mil. Dep't , 245 So. 3d 404, 407-08 (Miss. 2018). Further, "[i]t is a well-established rule that a taxing statute must be strictly construed against the taxing power and in favor of the taxpayer, and all doubts as to whether or not a tax has been imposed must be resolved in favor of the taxpayer." State v. Johnson , 238 Miss. 211, 222, 118 So. 2d 308, 313 (1960).
Discussion
¶13. This appeal comes down to one question: What is the nature of EKB's business?
¶14. According to EKB, it is in the business of providing wedding photography services . Its clients enter into multi-thousand-dollar contracts to engage the services of Burton, an experienced photographer. These clients pay to have their big days captured through still digital images, which are incidentally conveyed by a jump drive, DVD, or tablet, for which EKB pays sales tax. Burton also assists in engaging a third-party vendor to construct a coffee-table book of the images his clients select, for which Burton also paid sales tax.
¶15. According to the MDOR, however, the EKB wedding contracts are for the sale of tangible personal property. In the MDOR's view, EKB's customers are not engaging Burton's services; they are buying photographs conveyed in the tangible forms of a jump drive or DVD and sometimes coffee-table books and large linen prints.
¶16. The chancellor agreed with EKB, and so does this Court. After de novo review, we also conclude EKB is a photography business not subject to tax.
¶17. Under Mississippi Code Section 27-65-17(1)(a), the Legislature has levied a 7 percent tax on the gross retail sales of "every person engaging or continuing within this state in the business of selling any tangible personal property whatsoever ...."2 According to the MDOR, photographs, DVDs, diskettes, flash drives, jump drives, and coffee-table books are all tangible personal property, making the entire contract price subject to tax under Section 27-65-17(1)(a).
¶18. The MDOR contends there is no difference between customers receiving one thousand physically printed photos and customers receiving one thousand digital photos contained on a jump drive or disk. "[T]he end result is the same," the MDOR argues, because the "customers receive their photos in a tangible form." As support, the MDOR cites an unreported case from the Minnesota Tax Court. Bakewell v. Comm'r of Revenue , No. 7925 R, 2009 WL 427029 (Minn. Tax Ct. Feb. 19, 2009). Like this case, Bakewell involved a wedding photographer who no longer used film but instead created digital images transferred to the client by DVD. Id. at *2. The tax court concluded that the clients were not just paying for the digital images; they were also "paying for the particular portable and retrievable ‘form’ of the information"—i.e., the DVD. Id. at *6 . Thus, the tax court concluded the DVDs were tangible personal property. Id. The story would have been different, the tax court noted, had the photographer simply emailed the images or used some other electronic means of transfer. Id. at *6. Then, the digital images would not been subject to tax. Id. at *6.
¶19. But the Bakewell approach, which the MDOR urges, literally places form over substance. It makes an arbitrary distinction between digital images transferred from Burton's computer to the client's computer by disk, which Bakewell ruled was taxable, and digital images transferred from Burton's computer to the client's computer by electronic mail, which under Bakewell would not be taxable. In reality, EKB's clients did not pay EKB thousands of dollars for a jump drive or DVD that they could purchase at an office-supply store for a few dollars. Clients paid EKB thousands of dollars for Burton to take digital photographs of their wedding. And the undisputed facts show EKB's customers did not receive Burton's photographs in tangible form—they did not receive printed photographs, negatives, or film. Instead, they receive purely digital images. The tangible drive or disk is incidental to the nontaxable photography service being provided, much like the paper on which a lawyer prints a will, which is not subject to sales tax. See Miss. Code Ann. § 27-65-3(i) ; see also State Dep't of Revenue v. Omni Studio, LLC , 222 So. 3d 367, 375 (Ala. Civ. App. 2016) (). Moreover, Burton testified that he paid sales tax on the drives, disks, and tablets when he purchased them. He also paid sales tax when he engaged a third-party business to construct a coffee-table book using the photos his clients selected.
¶20. Importantly, the sale of still digital images is not subject to sales tax. In 2009, the Legislature began taxing the sale of "specified digital products." H.B. 1461, Reg. Sess., 2009 Miss Laws ch. 332, § 1 (codified as Miss. Code Ann. § 27-65-26 ). But conspicuously absent from the definition of "specified...
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