Sales Tax for Services
If you’re selling taxable items in multiple states, you must collect sales tax as soon as you reach the threshold the state has set — often $200,000 per year in revenue. But what about sales tax for services?
Sales tax is required on physical objects as a default in almost every state. Most services in most states are not taxable…but it’s complicated
From goods to services
Once upon a time, we spent most of our disposable income on goods. We bought groceries at the grocery store and clothes at a clothing store and books at a bookstore and paid sales tax on all those items.
Modern consumers spend more of their money on services than on goods. Now we spend more at restaurants than at grocery stores, and often we’re paying for delivery service when we buy food. We have a Kindle Unlimited subscription (not to mention Netflix, ESPN, Apple, and more) instead of a pile of books from the bookstore. We may even get our clothes through a subscription service.
We also spend more on spa services, childcare, and other services than our parents did. States are responding by charging sales taxes on more services than ever.
Goods or services?
The trouble is, there isn’t always a clear line between goods and services, never mind between taxable services and nontaxable ones.
For example, photographers used to charge fees for the service of taking photographs, with no sales tax. Then they would also charge for the photographs the client bought, with sales tax. The service and the goods were separate. Now, with photographs often being delivered digitally, photographers in some states don’t have to collect sales tax because there is no physical product changing hands.
But photographers in some other states must charge sales tax on the entire bill, because there is no longer a clear distinction between the goods and the services.
In still other states, photographers must charge sales tax if they hand over a CD or flash drive of photos, but not if they simply upload the photos to the cloud for customers to retrieve.
Each state has a different set of rules on which services are taxable under which circumstances. Web design is taxable in Texas and exempt in New York — based on where the website owner, not the website designer, is located.
Landscaping, cleaning, and construction services are likely to be taxable, but landscape design and architecture services are usually not taxable. Landscaping services may not be taxable if they are part of the construction of a new home, though materials used probably are.
In many cases, states decide to tax services and then hear from lobbyists and consumer organizations and back off on certain services. Some end up exempt for a variety of reasons that won’t be obvious to outside observers. It definitely isn’t just a question of common sense.
How can you tell?
If you provide services in more than one state, you must find out for each of those states whether you have nexus, whether your services are taxable, what the revenue threshold is, and what the rates are,
Sales taxes are complicated and confusing, and the rules change frequently. Sales Tax DataLINK gives you current information, accurate to the transaction level. But you may also need to get some expert advisory to make sure you are registered and filing in all the places where you need to do so.
That’s why we offer full sales tax services. Call us at 479-715-4275 and let us help with your sales tax compliance.
National Sales Tax The idea of a national sales tax has once again been introduced as a bill in Congress. The Fair Tax Act of 2023 is currently being considered in the House. This bill would, if passed, abolish the Internal Revenue Service, repeal...
Sin tax A sin tax is a type of sales tax intended to discourage people from buying a particular item. An extra tax on the purchase of cigarettes, soda, or alcohol may be intended to keep consumers from buying as much if these sinful items -- oral least...
The GAO speaks up on remote seller sales taxes The Government Accountability Office is responsible for providing important facts to Congress so they can make the best legislative decisions. They have just released a report on the question of sales tax...