I'll start of with some background on some simple forms of business tax. Whether one pays Sales Tax depends on where they sell the CDs. You WILL have to pay Sales Tax on the sale price of the CDs that you sell YOURSELF at live performances. To be totally legit, you will need a vendors/resale license from your city or state taxing authority. You do NOT have to pay Sales Tax on the CDs that you sell to a distributor or a retailer, because the retailer will ultimately charge the buyer sales tax when the CD is sold in the retail outlet.
Your company (You) WILL have to pay Income Tax on any Income (Revenue) that you receive from you music activities minus allowable business deductions and expenses. Now to your specific question. Artist royalties that are paid by your company (You) to others for their services as singers, etc are considered Business Expenses. When you do your tax return, there will be places to include allowable Business Expenses, which will reduce the amount of Business Income taxes that you owe.
If you are receiving royalties from another company, you will need to pay Income taxes on that money, minus allowable business expenses.
So the take home... Sales Tax is collected by the company/person who sells a product to the final consumer. Income taxes are paid by anyone/everyone who makes any money from their line of business. Money that you get from sales in store... You do not pay Sales Tax on, but you will need to pay Income Tax on. The amount of money that you pay to artists for royalties are Business Expenses that you will put on your Tax return. These Expenses and other expenses (i.e. manufacturing costs, supplies, promotional expenses, etc) you can deduct from on your Tax return and reduce your tax liability.
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