Tangible Means Tangible—State High Court Rules for Taxpayer in Sales Tax Dispute

As technology advances and an increasing number of products that used to be sold in tangible form are now instead sold in digital form, states are faced with the challenge of adapting their sales and use taxes, which have historically applied only to tangible personal property, to the modern economy. Mississippi, like several other states, has addressed this issue by extending its sales and use tax to apply to specified digital products, such as digital books and digital audio works. Miss. Code Ann. § 27-65-26.

However, what about other types of products that have historically been sold in tangible form that are now being sold in digital form but that the legislature has not specified as taxable in their digital form like, for example, wedding photographs? May a state tax administrator torture the meaning of “tangible personal property” so that it still encompasses these products even though they are now provided to customers in digital form? In a recent decision, the Mississippi Supreme Court said no, ruling for the taxpayer based on the court’s conclusion that tangible means tangible. Miss. Dep’t of Revenue v. EKB, Inc., No. 2021-SA-00441-SCT (Miss. 2022). Words have meaning and taxpayers should not back down when state tax administrators fail to follow the words of a taxing statute.

The Facts: EKB, Inc. (“EKB”) provides wedding photography services. Clients select one of EKB’s photograph packages, and every package includes the transfer of digital images via a DVD or flash drive. For nearly all packages, clients purchase copyrights to the images created by EKB. After the wedding, EKB uses a computer to adjust and crop the images and then uploads the images to the DVD or flash drive for transfer to the client. EKB pays sales tax on DVDs and flash drives when it purchases them for clients.

The Mississippi Department of Revenue (“the Department”) audited and assessed sales tax against EKB based on its assertion that EKB’s sale of its photograph packages were taxable sales of tangible personal property because EKB conveyed the photographs in tangible form to clients in the form of a DVD or flash drive. The assessment was sustained at the administrative appeal levels, but the Chancery Court ruled for EKB, and the Department appealed to the Mississippi Supreme Court.

The Decision: The Mississippi Supreme Court ruled for EKB holding that its photograph packages were not subject to sales tax. The court reasoned that “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.” The court concluded that what EKB’s clients were paying for was for EKB to take digital photographs of their wedding, and the DVD or flash drive was merely incidental to the transaction. The court also found it significant that, while the Legislature “has recognized the difference between tangible personal property and digital products” by expanding the sales tax to apply to specified digital products, the legislature did not include “still digital images” within the definition of taxable digital products. Finally, the court rejected the Department’s alternative argument that EKB provided taxable photo finishing services, noting that EKB “does not even use—let alone develop and print—film” and the legislature “has given no indication that digital editing services are to be included in ‘photo finishing.’”