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The New Frontier: Taxing Services


 Should haircuts be subject to sales tax?

The idea of applying sales tax to services is not new. Indeed, many states tax one service or another. For example, Washington State taxes the sale of repair services, cleaning services, and lawn maintenance services, and most computer and data processing services are subject to sales tax in Connecticut. The Tax Foundation notes that Hawaii, New Mexico, South Dakota and Wyoming have “broad-based sales taxes” that are applied to many services and business-to-business transactions. Even states that don’t have a general state sales tax have been known to tax some services: New Hampshire taxes utilities, and Delaware taxes personal and business services.

During the past few years, several states have considered taxing more services. Decreased revenue caused by the lingering economic downturn has prompted more than one legislator to look for different sources of revenue. The New York Times wrote back in March 2010:

In the scramble to find something, anything, to generate more revenue, states are considering new taxes on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns.”

That scramble is on again.

It can be argued that it makes sense to tax more services these days, since the American economy is more service oriented than it used to be. The Bureau of Labor Statistics lists manufacturing employment at 11,950 thousand for January 2013, versus service employment of 116,281 thousand for the same time period. Broadening the sales tax base to include services could be called prudent given these figures. Yet support for taxing services is far from universal.

The following states are currently considering altering the overall sales tax rate and broadening the base to include services:

Louisiana: Governor Bobby Jindal (R) has reportedly proposed raising the state sales tax rate, eliminating current sales tax exemptions, and collecting sales tax on services. Louisiana lawmakers have yet to reach consensus.

Minnesota: Governor Mark Dayton (D) would like to make a “historic cut to the sales tax rate.” He would also like to tax more services, such as dating services, garbage collection, diaper services, travel services, and others.

Ohio: Governor John Kasich (R) is calling for a reduction in the state general sales tax rate and expanding sales tax to numerous professional services, including lobbying, legal advice, and accounting.

Virginia: A transportation package proposed by Governor Bob McDonnell (R) has been approved, meaning that the state’s general sales tax rate will increase 0.3 percent.  Meanwhile, SB 767 -- which would tax the rental of rooms, lodgings, accommodations, or similar spaces – is lingering in committee.

According to the Federal Tax Administration, states divide services into the following categories for the purpose of taxation:

  • Utilities;
  • Personal services;
  • Business services;
  • Computer services;
  • Admissions/amusements;
  • Professional services;
  • Fabrication, repair and installation; and
  • Other services.

In other words, there are a lot of untapped revenue sources out there.

Is your businesses ready for sales tax changes?

photo credit: kiddharma via photopin cc


Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.