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Sunday, July 13, 2014

Art Licensing: Do U.S. artists need a business license to license their art?

Questions often asked by United States artists entering the licensing industry is if they need to have a business license or a seller permit to be able to license their art? There are all types of business licenses/permits such as seller's permit, federal and state business licenses, and city/county business licenses. Each is for a particular purpose. Artists that ONLY license their art may not need a business license. It depends upon the city and state they live in. See below for discussions on the different ones.

• Seller's Permit
A seller's permit (resale certificate) is needed in most but not all states IF a person sells merchandize at retail (to consumers). The number on the permit issued is called a resale number. Artists who license their work to manufacturers are not selling merchandise at retail so they do not need a seller's permit.

And, whether artists who sell to consumers needs a seller's permit or not depends upon the state. Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect sales tax so a seller's permit is not needed when artists sell their work to consumers in those states. To find out information about seller's permits in the different states, go to the U.S. Small Business Administration website. Hint: Artists are not listed as a business type so use General Licensing. And, to find out more about resale certificates, read "What is a Resale Certificate And Who Can Use One?"

– Internet stores
According to Nolo "Despite what you sometimes hear . . . some Internet sales are subject to sales tax, and even when a site doesn't collect sales tax, consumers are technically responsible for remitting any unpaid sales tax on online purchases directly to their state." Also, " If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state." For more information, read "Sales Tac on the Internet".

• Federal Business License
A person only needs a federal business license if their business is regulated by a federal agency such as alcoholic beverages, agriculture, aviation, etc as shown in "Federal Licenses & Permits". Since art is not regulated by a federal agency, a federal business license is not needed to license art. Note: Artists may be requested to supply their federal number to a licensee so that they can report the revenue the artist received to the federal and state tax boards. In that case, the federal number is the artist's social security number. 

NOTE: Artist Kiffanie Stahle shared the following information.
"One note on the federal tax ID number issue. Even sole proprietors can request a free employer identification number (federal tax ID number) from the IRS to give to licensees. Licensees will then use this number on your 1099s and the IRS will link it to your individual tax return. Thus keeping your SSN a little safer!  Here's the link to obtain an EIN: https://sa.www4.irs.gov/modiein/individual/index.jsp  "

• State Business License/Permits
Whether an artist needs a state business license or permit depends on the state she/he lives in. Some states require any business operating in the state to register for tax-specific licenses/permits whether based in a commercial location or out of the home. Other states may not require any license/permit. To find out what business licenses are required in your state, read "Find Business Licenses & permits".

– Business having employees
The requirements in operating a business with employees is more complicated because the owner probably will need to file for additional permits and file forms such as employer identification number, registration of employees, business income tax statements, etc. Also they must comply with laws on minimum wages, hours, working conditions, safety, discrimination, etc. To find out information about the requirements in different states when having employees, go to the U.S. Small Business Administration website.

– Limited Liability Company (LLC)
It is not required but some artists decide to form a limited liability company (LLC) to protect their personal finances if their art licensing business is sued for copyright infringement or breach of contract. To do so, it must be filed with the Secretary of State's Office in the state the business is operating in. If the business is a sole proprietorship, it does not need to be registered with the state. Note: Many states require a sole proprietor to use their own name for the business name unless they formally file another name as a trade name, or fictitious name. For more information, read "Register With State Agencies".

– Fictitious business name (doing business as = DBA)
Most states, but not all, require that the owner of a business register a fictitious business name. In some states the business name could be considered fictitious even if additional word (s) are added to a surname while other states do not consider it fictitious as long as the surname is in the business name. Filing a fictitious name often involves publishing in a general circulation newspaper the opening of the business with the fictitious name. Note: Unless the fictitious business name is filed, bank accounts with the fictitious business name cannot be opened. For more information, look at your states requirements on fictitious business names. For more information, read "Register Your Business Name".

• City/County Business License
Some counties and/or cities require any business operating within their limits to take out a business license even if the state does not necessitate one. The license usually requires a yearly flat fee or may depend upon the gross amount earned. If the business is home based, it may require a zoning variance with stipulations on not allowing customers to visit or employees to work on the premises. To find out information about city/county licenses in the different states, go to the U.S. Small Business Administration website.

• Reporting Income to IRS and State
For artists that have a thriving art licensing business, know that they need to report the income earned to the IRS. Also, they know to report income to their state unless they live in Alaska, Florida, Nevada, New Hampshire*, South Dakota, Tennessee*, Texas, Washington, Wyoming. But artists that have just started licensing their work may not be aware that ANY income earned no matter how little may need to be reported to the state and MUST be reported to the Internal Revenue Service (IRS). According to IRS "It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income. . . Taxpayers must report all income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands." For more information about reporting income to the IRS read, "Reporting Miscellaneous Income". And, read "States Without an Income Tax" for more information.

* Must pay interest and dividend income.

Your comments are welcome. Click on the comments section (below) to write your comment. Note: Some people have a problem in leaving a comment. The most successful method is to comment as Name/URL (your name and website or blog with a "complete" URL address).

7 comments:

  1. Thanks for the info
    How about if the artwork is sold to a manufacturer to be reproduced on products?
    does the artist need to collect the sales tax on such sale ?

    ReplyDelete
  2. Ritika, It is up to the manufacturer to collect sales tax if they sell their product to consumers or if they sell the products wholesale to retailers than it is up to the retailers to collect sales tax from the consumers. That is why artists do not have to have a seller's permit and collect sales tax if they only license their work :)

    ReplyDelete
  3. Thanks
    I guess I was not clear in my question-
    What if the design is 'sold ' outright with no strings attached - for a flat fee and the copyright is transferred to the buyer? Atelier Style

    ReplyDelete
  4. If you sell your design outright to a consumer, then you need a sellers permit and charge sales tax. But if you sell your design to a manufacturer that then sells their product with your design on it, it is the manufacturers responsibility to make sure the sales tax is collected from the consumer.

    ReplyDelete
  5. Great post Joan!

    One note on the federal tax ID number issue. Even sole proprietors can request a free employer identification number (federal tax ID number) from the IRS to give to licensees. Licensees will then use this number on your 1099s and the IRS will link it to your individual tax return. Thus keeping your SSN a little safer!

    Here's the link to obtain an EIN: https://sa.www4.irs.gov/modiein/individual/index.jsp

    ReplyDelete
  6. Thanks for the information Kiffanie. That is a great idea!!!

    ReplyDelete
  7. Yikes, I just learned a couple of very important facts related to filing income. Thanks, Joan, for offering this valuable info.

    ReplyDelete