Taxing Services - What You Need to Know
- Sales and Use Tax
- September 16, 2014 | Avalara
Over the past several decades, we have seen many states subject various services to sales tax. The approach to taxing services varies by state, but you’ll generally see one of two approaches. For the majority of states, sales of services are normally exempt, and only certain services specified by the state in its tax statutes are subject to tax. To find the taxable services, look in the state tax statutes for the list of enumerated taxable services.
The other approach a state can take in taxing services is under the “gross receipts” approach. In this case, all services are taxable unless specifically exempted. The four states where this approach is currently taken are Hawaii, New Mexico, South Dakota and West Virginia.
The next question is “What services are usually subject to tax?” While every state has its own list of taxable and exempt services, there are certain categories of services that you will typically see states taxing. Let’s take a look at a few of the main service categories.
Tangible Personal Property Services
The most common type of services that are taxed are those related to tangible property. These services can include installation, repair, inspection, or maintenance of tangible property. If there is an exemption for the service, the service must be separately stated on the invoice to the customer. If the exempt service is not separately stated, the service may be considered part of the sale of the property and will follow the taxability of the property. If the item being serviced is exempt – like a piece of manufacturing machinery – an otherwise taxable service is usually exempt.
Real Property Services
Real property is defined as land, buildings, fixtures, and structures affixed or attached to the land and buildings. Sales of real property are exempt from sales and use tax. But services to real property could be taxed. There are a number of issues to consider when looking at real property services. Some states differ in the taxation of residential versus commercial real property services. In these states, services to residential property are generally exempt and services to commercial property are taxable.
In addition, many states distinguish between new construction and remodeling services. New construction is generally not taxable, and the contractor is subject to tax on the cost of materials. Some states consider remodeling, on the other hand, to be a taxable service.
Generally, states exempt sales of professional services. Professional services include accounting, legal, medical, advertising and other services where the provider is charging for their expertise and there is no tangible personal property involved in the rendering of the service.
Some states do tax various professional services. The types of services taxed generally include architectural, engineering, human resources, and data processing services. Professional services are an area that many states are considering taxing. These types of services are typically considered business services over professional services as they are not necessarily customized in nature and may not require specialized skills.
Of course there are many other categories of services, and states have become more creative in their taxing of them. Staying on top of the rules is key – whether you are a service provider or a service customer.
I hope this information helps you gain a better understanding of when and how sales tax applies to sales of services. Along with Scott Peterson from Avalara, I’ll be discussing the above and much more at the Sales Tax Institute’s “Sales Tax on Services – What, Where and How” webinar on September 30. To register, or for more information, click here:
Speaker bio: Diane L. Yetter is a strategist, advisor, speaker, author and expert witness in the field of sales and use tax. She is president of YETTER, a firm that provides sales tax services including system analysis and strategy, transaction tax automation implementation assistance, training, transactional planning and general consulting to clients of all sizes in myriad industries. She is also the founder of The Sales Tax Institute, a premier think tank that offers live and online courses to educate business professionals about sales and use tax.