How to tax a virtual haircut
Stories of virtual haircuts started cropping up in the news in mid-April, roughly a month after the first stay-at-home orders took effect. Whether it’s wise to let an untrained friend, parent, partner, or sibling cut one’s hair depends on several factors: How beloved the hair, steady the hand, or strong the relationship. Whether sales of virtual haircuts should be taxed is another matter.
Some stylists aren’t charging for their online advice, so the tax issue is moot. Others are relying on virtual cuts to keep themselves afloat during this challenging time. You Probably Need a Haircut, which connects hairstylists from all over the world with shaggy clients, charges $18 for a women’s at-home hair mask (20 minutes) and $75 for a women’s full cut (75 minutes), with various services and charges in between. In some states, those charges may need to be taxed.
Personal services like haircuts are exempt from sales tax in most states but generally taxed in Hawaii, Iowa, New Mexico, and South Dakota. In New York City, haircuts are exempt from state sales tax but subject to New York City sales tax.
Presumably, professional stylists know the law where they practice and how to tax the services they typically provide. Unfortunately, different rules or rates may apply to sales of virtual haircuts.
But is a virtual haircut still a haircut, really? Or is it more of a tutorial? Or perhaps some sort of online training?
As with the wisdom of cutting one’s own hair, it depends. Some state tax authorities could consider virtual haircuts to be an education service. Yet a state could conceivably treat a virtual haircut like a physical haircut for tax purposes, or as online training (which is not the same thing as an education service).
Of course, state tax authorities may not know how to categorize or tax a virtual haircut, because who ever heard of a virtual haircut before the new coronavirus (COVID-19) pandemic?
Unfortunately, businesses need to know what kind of service they provide in order to correctly tax it. In South Dakota, sales categorized as training and seminars or online training are generally subject to sales tax, like beauty and barbering services, but educational services are generally exempt. In West Virginia, beauty and barbering services are exempt but educational services, online training, and training and seminars all are typically taxed.
Sourcing the sale
It’s also necessary to establish where the sale occurs, which would be either where the customer receives the service or where the service is performed. That would have been the same place before COVID-19 hit. Now, the stylist and the client may be in different locations.
A traveling stylist who cuts hair up and down the Eastern Seaboard would likely need to be registered to do business in multiple states and tax their sales according to the rates and rules in effect in each location. But does a stylist working from home in New York City need to do the same when providing virtual cuts for clients residing in Yonkers, New York; Hoboken, New Jersey; or Maui, Hawaii? Possibly.
Haircuts are generally sourced to where the customer receives the service, which is where the head of hair is located. Similarly, education services are generally sourced to the location of the student, whether that student sits in a physical or virtual classroom.
That said, a state may not require an out-of-state hair stylist to register to collect and remit tax on a virtual haircut if the stylist doesn’t do much business in the state. Although almost all states now impose a sales tax collection obligation on remote vendors, most also provide an exception for small sellers.
So long as states require us to stay at home to help slow the spread of COVID-19, tax authorities may not audit businesses doing what it takes to survive. Several have already said they’re suspending new audits during the pandemic, or that they won’t hold businesses liable for income tax nexus based on employees working remotely in the state because of stay-at-home orders. Yet once those orders are lifted, all bets are off.
Depending on what the future brings, virtual haircuts, like virtual events, could be here to stay. Should that happen, states may take more of an interest in how they’re being taxed.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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