Artists may receive money in a variety of ways, including awards and prizes at shows, project grants, scholarships and fellowships. The prize money or the monetary value of an award (the cash value of a gift certificate, for instance) that an artist receives at a show is taxable at 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 artist 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 on the recipient teaching or offering demonstrations or some other part-time service, however, a portion of the fellowship or scholarship will be taxed.
The sale of one’s work, of course, also occasions the payment of taxes to state and federal agencies on either a monthly, quarterly or annual basis. Those artists who sell their work at retail or wholesale shows in the state where they live or out-of-state are required to apply for a resale tax number both in their home state 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 in the area of $10, although some states have no charge. In some cases, registration is for one year, although some states permit applicants to receive a two-day or weekend resale tax number. Most show promoters require a state resale tax number as a condition of taking part in the event. The artist will receive from the state information about how much sales tax to collect (generally, between three and eight percent) and how to pay it – often, a coupon book is enclosed (the coupons are to be mailed back with sales tax receipts). Usually, applicants receive their number and paperwork from the state in a couple of days.
When selling out-of-state, one must pay that state’s sale tax (and not one’s home state sales tax), an amount which, in most cases, may be deducted on one’s federal income tax form. If the state one is selling in has no sales tax, no sales tax need be paid to one’s home state either.
Click here to see a list of where to apply for resale tax numbers around the United States
However, there is more to be said about artists and taxes than just whom and how much to pay. In some states, artists may receive a tax break. Since 1998, artists in Rhode Island are 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 will be assessed for any art work sold within the city’s arts and entertainment district for one-of-a-kind art work or limited production works of art. (Art galleries in these districts are also exempt from collecting the sales tax.) In order to participate, artists need to apply for income tax and sales tax exemption from the Rhode Island State Tax Administrator; the administrator will then send out 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 artists 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.”
There are approximately 300 designated arts and cultural districts throughout the United States, but Rhode Island is only the second state to legislate tax-free zones for artists in them; Maryland is the other. In some arts districts, cities have authorized zoning variances to permit artists to live and work in area buildings – tax credits to developers are often used to keep rents or purchase prices below market value – but Maryland and Rhode Island are unique in their willingness to provide tax havens to artists as an inducement to repopulate the downtowns.
One more art and tax issue of interest: The state of Maine accepts works of art in lieu of the payment of state inheritance taxes.