Business to Business Sales Tax a Hidden Tax?

“Ultimately,” says David Olson, president of the St. Paul-based Minnesota Chamber of Commerce in an opinion piece in the Duluth News-Tribune, “the business-to-business tax is a hidden and regressive tax on consumers.”
 
The tax Olson has in mind is a new tax on business-to-business services in Michigan. Michigan joins Hawaii and North Dakota in requiring companies that provide services to other businesses to charge taxes. Most states require taxes on goods sold to businesses, but not on services.
 
Businesses will now have to pay sales tax on marketing, on hardware repair and other IT services, on architectural or engineering services, on payroll and accounting services, and so forth. Altogether, the addition of sales taxes to these ordinary services could spell a significant and sudden increase in the cost of doing business.
 
Olson foresees a constellation of consequences:
  • Businesses will raise prices to meet the extra costs.
  • Once prices are raised as high as possible without losing customers, businesses will begin cutting employee benefits and perhaps laying off workers.
  • Small businesses may go under, while large ones may just leave Minnesota.
  • Businesses will need help from accountants to figure out new tax rules, and will have to pay taxes on those services.

These actions would increase the cost of living for Minnesotans, while perhaps increasing unemployment. We can imagine some more possible consequences:

  • Businesses will cut back on those B2B services, harming business that provide those services — which will of course have just taken the hit of paying taxes on B2B services themselves.
  • Businesses will start getting their services online from out of state service providers.

Of course, products from Sales Tax DataLINK are designed to help with all sales and use tax issues, and we invite businesses of all sizes in Minnesota to contact us immediately for a free evaluation. Is the B2B service tax a hidden regressive tax? We can see where Olson is coming from. The Center on Budget and Policy Priorities argues in favor of service sales taxes in general. They point out that someone who rents a videotape (the article was written in 2009, when you could do that) pays taxes and the person who watches it as pay-per-view does not. There is not, they say, enough difference between goods and services to make it a fair distinction for sale taxation. The CBPP would, however, exempt B2B service taxes. They point put that charging for a service used in preparing goods and services for sale to others leads to pyramiding taxes — that is, situations in which the end consumer pays for multiple layers of taxes on the same goods or services. At Sales Tax DataLINK, our goal is to make compliance as easy as possible, but we’d be interested to hear your views on this type of taxation. Do you live in one of the states that already has this type of tax? If so, what consequences have you seen? Check Biz Toolkit’s interactive map of sales and use tax regulations state by state to find out which states require sales taxes on B2B services.

Latest Articles

What’s up with SSUTA?

What’s up with SSUTA?

Back in 2018, when the Supreme Court decision on Wayfair vs. South Dakota allowed states to make new laws requiring remote sellers to collect and remit sales tax on their behalf, there was a little bit of discussion on the question of whether this would...

read more
Reopening for business: Don’t forget sales tax

Reopening for business: Don’t forget sales tax

As businesses reopen with a post-pandemic future in mind, a lot of sales tax issues can come up. However, they may not obviously look like sales tax issues. If they don't your company could miss some important points. Goods and services Many companies...

read more
Sales Tax Surprises in the Pandemic

Sales Tax Surprises in the Pandemic

Congress has just finished working on a COVID-19 relief bill, and one of the big issues turned out to be...sales tax. Congress might not look at it that way. From their point of view, they were debating whether states need relief funds as businesses and...

read more