If you are a service provider it is pertinent that you understand whether or not you are required to register for sales and use tax in the state or jurisdiction you are providing service.
When it comes to the taxability of your products (which are typically tangible items) navigating whether to charge sales tax or not can be pretty straightforward. But what about services? Services aren’t solely tangible items, so where does that leave us in terms of taxability? Well, as it goes in the sales tax world, it all depends.
Let’s dig a little deeper, shall we?
Types of Services (Not Exhaustive)
There are a plethora of different types of services out there but most services can be categorized into six different groups. Here's a brief run-down of each category.
- Professional Services - The utilization of these services is to acquire knowledge or expertise offered and does not involve tangible personal property. This type of service implies that the service is being performed by a recognized professional (e.g. doctors, chiropractors, accountants, licensed professionals, etc.).
- Tangible Personal Property (TPP) Services - Services that involve tangible personal property will typically involve the use of expertise along with direct contact with tangible personal property. Some examples are equipment or automotive repair, or most installations.
- Services to Real Property - These are services that are performed on real property, such as a building, a structure or land. The provider of this service is regarded as the consumer of the tangible personal property that they utilize when carrying out their service. This can include trades like air-conditioning and heating, roofing, painting, electrical, etc.
- Personal Services - These are made up of businesses that capitalize on providing personal care and self-improvement. This includes but is not limited to salons, tanning salons, or even pet grooming.
- Business services - Services done for businesses such as credit bureaus, reporting agencies and more.
- Amusement and Recreation - This encompasses things like recreational events. Tax admission charges are tacked on to things such as sporting events or amusement parks.
Considerations When Evaluating Taxability of Services
Many businesses make the false assumption that if their services do not coincide with goods sold then these services are not taxable. That simply is not true and can be a costly assumption. Here are some things to consider when determining the taxability of your services:
- Know Your Nexus Footprint
This is always first and foremost when becoming compliant, know your nexus. Almost all states require sellers to register and then collect and remit sales tax.
Not only will having a physical presence trigger nexus, but nexus can also be created by economic activity.
- Recognize the Variability in States that Tax Services
Taxation of services is continuously evolving in every state. Different aspects of services continue to be discussed. For example, there has been a lot of recent discussion around digital advertising services and the sale of digital goods. There is no consistent sales tax on digital items in every state, despite attempts to establish guidelines.
To illustrate the scope of differences in each state let’s talk about a few examples. Hawaii, New Mexico, and South Dakota typically tax all types of services. Although that’s not the case for all states. That is where the main challenge lies for businesses; determining which states require taxation of services and which do not. In some states, businesses must charge sales tax if the service they provide is in conjunction with the sale of physical goods.
To complicate things, each state continues to change its requirements.
Some of the recent changes have consisted in Ohio and Texas. These states have taken action to ease sales tax on specific services. At the same time, other states like Indiana, Connecticut, and Nebraska are making a move to intensify the taxation of services.
It all boils down to knowing the legislation of the states you have nexus and remaining watchful and aware of what is current and what is changing. There are more states and jurisdictions that are likely to make a general movement toward taxing services.
- Determining Service Taxability
As stated above, state laws vary significantly when it comes to which types of services are subject to sales tax. So we will talk generally here, but keep in mind that there are exceptions in almost every scenario and working with a sales tax professional is the only way to guarantee that you remain compliant. That said, here is a brief rundown of the general sales tax involvement with different services.
Professional services which consist of medical and legal services are generally exempt from sales tax responsibilities. Personal services such as lawn care, going to a hair salon, or even pet grooming are generally subject to sales tax.
Retail items like clothing, handbags, and accessories are subject to sales tax. Prescriptions and food are typically exempt from sales tax, yet the legislation varies greatly from state to state on this one and you may need to dig a little deeper into your state's laws to be certain.
Digital and online items tend to be more ambiguous and complex. Sales tax laws have changed over time as streaming services have become more common and utilized. More and more people are consuming media and television online. Therefore, most states now tax digital downloads, which include e-courses, downloadable books, and digital music files.
Utilizing a Sales Tax Professional
The key to successful sales tax compliance is education. Knowing the sales tax laws of your state and jurisdiction and knowing where you have nexus can be an overwhelming endeavor. We are here to help your business succeed. We can help ensure you are maintaining compliance in the states you may have sales tax obligations. All it takes is reaching out to us on our “What’s Next Call” to learn how we can help you. There is confidence in collaboration, finding peace of mind is simply a phone call away.