Hi Lisa, In California, at least, your "value added" is taxable -- it
is taxable labor (the only labor non-taxable in California is very
particular types of repair work).
There is a common misconception that labor is not taxable.
A sculptor friend of mine (a commercial sculptor, like me) claimed
that because most of the value in a commercial wax or clay is in the
labor and not in the material, that he could collect sales tax on
the material only and save a mint in sales tax payments (in my
industry, we bid by job and sales tax is to be considered within the
bid and not charged on top of the bid. This way he could underbid
competitors by almost up to 7.75% without sacrificing anything) Of
course, he also argued that sales tax is to be collected on
end-product only, and since he was producing models to be used for
manufacture, they were not end-product.
He kept nice, neat documentation showing what material actually
changed hands, and "charged" sales tax on the materials that were
used in his sculpt.
The State caught up with him about a year after his
quarter-of-a-million-dollar year (his studio produced a lot of Star
Wars toy sculpts that year). He hired an attorney (I guess the
attourney was kind of a goober, too) and tried to fight it in court.
He lost. It cost him back-taxes in the tens of thousands of
dollars, plus interest, plus penalties. Then they audited his other
years of business, and he had to pay more and more and more.
The thing that I never understood was -- in the l
paperwork given out by the State Board of Equalization -- they are
VERY clear that VERY few types of labor are non-taxable. Didn't he
ever read the paperwork?
I realize that small enterprises think that maybe they will "slip
through the cracks", and that does happen (usually when it is a
question of wanting something good to happen); but the tax board is
tenacious once angered, and according to my friend it is NOT
something that you want to have happen.
Maybe you should get the infomation from your state's Board of
Equalization (or whatever they call the sales tax entity in your
state). It could clear up for you whether you are breaking the law
or not (and, unfortunatelly, you probably are...).