A Word About Taxes Don’t Flinch — There’s Help Out There

February 2023, by Daniel Grant

Artists and craftspeople receive money in a variety of ways, including awards and prizes at shows, project grants, scholarships, and fellowships. 

The monetary value of an award, or the cash value, that a craftsperson receives at a show is taxable at the normal state and federal rates. The same taxability is true for money received through project grants from a private or governmental agency. 

On the other hand, there is no tax on fellowships and scholarships if the craftsperson is studying for a degree at an educational institution — including tuition, lodging, equipment, and travel expenses — nor is an award taxable if it comes from a governmental agency or school. If the award is contingent upon the recipient teaching or offering demonstrations or some other part-time service, a portion of the fellowship or scholarship will be taxed.  

When and Where Do Taxes Need To Be Paid? 

The sale of one’s work also warrants the payment of taxes to state and federal agencies on either a monthly, quarterly, or annual basis. Those artists and craftspeople who sell their work at retail or wholesale shows are required to apply for a sales permit both in the state where they live and where the shows will be held.  

Usually, one applies with a state’s department of revenue, and the cost of registering to sell work is around $10, although some states have no charge. In some cases, registration is for one year, although there are states that permit applicants to receive a two-day or weekend sales permit. Most show promoters require a state sales permit as a condition of participating in the event. 

Help Is Available to Sellers 

The artist or craftsperson receives information from the state about how much sales tax to collect, generally between 3% and 8%, and ways to pay it. A coupon book is often provided. The coupons are to be mailed back with sales tax receipts. Applicants typically receive their number and paperwork from the state in just a few days. 

When selling out of state, one must pay that state’s sales tax rather than the sales tax of one’s home state — an amount that in most cases may be deducted on one’s federal income tax form. If the state the artist is selling in has no sales tax, then no sales tax needs to be paid to one’s home state either. 

Tax Breaks and Incentives 

In some states, artists may receive a tax break. Since 1998, artists in Rhode Island have been given tax incentives to live and work in specific areas. 

In setting up these districts, the General Assembly declared that “the development of an active artistic community, including ‘artists in residence’ … would promote economic development, revitalization, tourism, employment opportunities, and encourage business development by providing alternative commercial enterprises.” 

The law exempts artists who live and work within the districts from state income tax on all income generated from their creative works. Once an artist requests and is approved to participate, no sales tax is assessed for any one-of-a-kind artwork or limited-production works of art sold within the city’s arts and entertainment district. Art galleries in these districts are also exempt from collecting the sales tax. 

To participate, artists need to apply for an income tax and sales tax exemption from the Rhode Island state tax administrator. The administrator then sends an evaluator from the Rhode Island State Council on the Arts to assess the applicant’s artwork and determine whether it qualifies as “one of a kind” and “limited.” 

The state’s definition of “one of a kind” reveals the categories of art that are covered by the legislation: “a book or other writing; a play or the performance of said play; a musical composition or the performance of said composition; a painting or other like picture; a sculpture; traditional and fine crafts; the creation of a film or the acting within said film; the creation of a dance or the performance of said dance.” 

The New England Foundation for the Arts identified Pawtucket as the municipality with the third-highest number of visual artists, musicians, and performing art enterprises in Rhode Island, according to Christopher Hunter, a spokesperson for the city. This has made the municipality a laboratory for the state to try out the concept of generating economic activity through tax breaks in the arts. 

Oddly, neither the city nor the state has tabulated the lost tax revenues from artists or the increases in other revenues from heightened business activity, but some of the artists who live and work in Pawtucket commend the initiative. “I’ve probably saved several thousand dollars in sales taxes,” said Mimo Gordon Riley, who lives in Providence but maintains a studio in Pawtucket, out of which she sells her paintings.  

She added, “Artists are asked all the time to donate their work for charity auctions, and there is really nothing in it for them to do that” — a federal tax law only permits artists to deduct the cost of their materials rather than the fair market value of their work when making a charitable gift of it, which may be an example of the tax code penalizing artists — “so providing a benefit of this kind to artists seems only fair.” 

There are approximately 300 designated arts and cultural districts throughout the United States, and Rhode Island is not the only state to legislate tax-free zones for artists. 

Maryland is the other, with 29 of these districts throughout the state, according to Steven Skerritt-Davis, executive director of the Maryland State Arts Council. That initiative began in 2001, and in 2020, the number of jobs created because of the districting was 1,454, providing wages of close to $47 million and just over $10 million in overall tax revenues. 

There are currently 18 states that have enacted laws to create arts and entertainment districts, although only Maryland and Rhode Island allow artists to be exempt from the payment of sales or income taxes. 

For a time, Louisiana eliminated the requirement for artists to pay state sales taxes on the sale of their work, but this was rescinded in 2018 as part of a measure to address a fiscal crisis there. Other states, such as California and Colorado, have established tax incentives for cultural districts, but those are targeted at nonprofit arts organizations and real estate developers who create live/use spaces for artists and arts groups. 

Where to Find Information About State Sales Taxes