Do You Have To Pay Sales Tax On Services?

A state-by-land assay of charging sales taxation on services

When country legislatures in the United States implemented the first sales revenue enhancement laws to heave revenues in the 1930s, the American economic system depended on the manufacture and sale of concrete goods. Typically, early sales tax laws allowed only the taxation of "tangible personal property" (TPP), rather than taxing services.

Equally the United States has shifted from a manufacturing-based economy to a service-based economy, many states started to impose sales and use tax on services as well. Many businesses that provide services are nevertheless unaware of these statutory changes—some mistakenly believe they don't have to pay whatsoever sales taxation at all, even if they're selling services all over the United States.

Every country taxes services in its own way

This guide is designed to provide an overview of the complication of sales tax on services by state.

5 U.S. states (New Hampshire, Oregon, Montana, Alaska, and Delaware) do not impose any general, statewide sales revenue enhancement, whether on goods or services. Of the 45 states remaining, four (Hawaii, Southward Dakota, New United mexican states, and Westward Virginia) tax services by default, with exceptions only for services specifically exempted in the law.

This leaves 41 states — and the District of Columbia — where services are not taxed past default, simply services enumerated by the state may be taxed. Every one of these states taxes a dissimilar set of services, making information technology difficult for service businesses to understand which states' laws require them to file a return, aswell every bit which specific elements of their services are taxable.

Categories of taxable services

No two states tax exactly the aforementioned specific services, but the general types of services existence taxed can exist divided roughly into six categories.

Services to TPP: Many states accept started to tax services to tangible personal holding at the aforementioned rate as sales of TPP. These services typically meliorate or repair property. Services to TPP could include anything from carpentry services to machine repair.

Services to real property: Improvements to buildings and land fall into this category. One of the most commonly taxed services in this expanse is landscaping and backyard service. Janitorial services also fall into this category.

Business services: Services performed for companies and businesses fall into this category. Examples include telephone answering services, credit reporting agencies and credit bureaus, and extermination services.

Personal services: Personal services include a range of businesses that provide personal grooming or other types of "cocky-improvement." For example, tanning salons, massages not performed by a licensed massage therapist, and animate being training services can be considered "personal services."

Professional services: The to the lowest degree taxed service area, in large part because professional person groups have powerful lobbying presences. Professional services include attorneys, physicians, accountants, and other licensed professionals.

Entertainment/Recreation: Access to recreational events and amusement parks, as well every bit other types of entertainment. Some states that revenue enhancement very few other services, like Utah, nonetheless tax access charges to nearly sporting and entertainment events.

How to apply this United states of america sales tax map

Remember that inside each category of services, states can even so take drastically different regulations. For example, both Florida and Iowa are marked every bit taxing "business services," even though Iowa taxes a wide range of these services and Florida simply taxes security and detective services.

For more details nearly the specific taxation liability of your business in private states, consult country Departments of Revenue for additional information.

Services taxability map of United States

Summary of service taxation of United states of america states

Rules to follow when evaluating sales tax on services

1. Avoid making assumptions

Many companies presume services delivered in conjunction with goods sold (east.g., swimming pool and pool cleaning, computers and maintenance, structure materials and installation) aren't taxable, but that'due south ofttimes non the case. Delaware, Hawaii, New United mexican states, and S Dakota tax virtually services. Still others, similar Texas and Minnesota, are actively expanding service taxability.

Businesses that sell services across multiple states demand to know where those services are subject to sales revenue enhancement. The fact that sales taxation laws frequently change makes information technology challenging to remain in compliance.

two. Call back that sales revenue enhancement rates can (and do) alter

States regularly change product and service taxability rules, and the onus of staying on top of changes is on businesses. For example, Washington state lawmakers decided to tax martial arts and mixed martial arts classes in the fall of 2015. Two years afterwards, many of those services were one time more exempt. Failure to correctly use sales taxation rates and rules to products and services can lead to plush errors.

Knowing which rate to charge and which sales tax rules apply is peculiarly challenging for companies that sell goods or services in multiple states. No 2 states accept the same sales taxation laws.

three. Sympathize your nexus exposure

Most states now require sure out-of-state sellers to register with the revenue enhancement dominance then collect and remit sales tax. What'south challenging is figuring out which states require which businesses to do and then. That depends on nexus — the connection between a business organization and a state that triggers a sales tax collection obligation.

Having a concrete presence in a state always triggers nexus, simply thanks to the United States Supreme Court decision in South Dakota v. Wayfair, Inc. (June 21, 2018), nexus tin as well exist created by economic activity solitary (economical nexus). As of June 2020, 43 states and the District of Columbia crave out-of-state businesses with a certain volume of sales or number of transactions in the state to collect and remit sales tax.

Determining nexus is the first step toward sales revenue enhancement compliance.

4. Services sold with taxable goods can complicate sales tax

Many businesses that provide customer back up, installation, or warranty services in conjunction with the sale of a physical expert need to hire an army of accountants to decide what's taxable and what's exempt. If you lot sell service contracts separately or in tandem with sales of tangible goods, you may exist liable to collect sales tax.

While Hawaii, New Mexico, and South Dakota by and large tax all sales of services, many other states tax some services but non others. The challenge for businesses is determining which services are taxable in states where they have nexus (an obligation to collect sales tax). In some states, businesses must charge sales revenue enhancement on services provided in conjunction with sales of physical goods.

5. The truthful object test can aid determine service taxability

When a auction includes both a product and a service, some states apply a truthful object exam to make up one's mind the taxability of the transaction. If the main purpose of the transaction (the true object) is the sale of taxable belongings or equipment, the entire transaction is subject area to sales tax. If the main purpose of the transaction is instead the sale of an exempt service, the entire transaction is generally exempt.

Combined sales of products and services are more than common in some industries than others, notably the construction, manufacturing, and medical industries. For example, an insulin monitor often accompanies the sale of diabetes treatment. In this example, the product is secondary to the service, and taxability is based on the real object of the transaction — the service provided.