When Should I Charge Sales Tax on Services?
- Apr 22, 2016 | Laura McCamy
If you are in the business of providing a service such as accounting, security, or law, you may have started your business without paying attention to sales taxes. As more states start requiring sales tax to services, however, it pays to understand sales tax rules that might apply to your business.
If your business has sales tax nexus (a physical location or other connection) in New York, Virginia, New Mexico, or Hawaii, plan on adding sales taxes to your service fees. Most services are taxable in these four states.
Service on the Side
There are two types of service businesses: those that also sell tangible personal property (TPP) and those that don’t. Examples of service sales that include TPP are an appliance shop that offers installation services, a hair salon that sells hair care products in addition to charging for salon services, and a contractor who charges clients for both materials and labor. The TPP sold by each of these businesses is subject to state sales taxes in most states. The rules for the labor involved are much more varied.
For instance, if you buy a washer/dryer in Florida and the retailer installs it for you, the installation charges are subject to sales tax. Same in Minnesota, but not in California. If you get your haircut in New York City, you will pay sales tax on the cost of the trim; if you head out to Poughkeepsie, that hair cut is tax-exempt. In New Jersey, you will pay tax on the labor to put in a new lawn but not the work needed to repave your driveway.
This is all by way of saying that local rules can be quite complex. In California, labor is considered taxable if it’s inextricably connected with the sale of taxable goods, while labor to repair existing goods is not subject to CA sales tax. The distinction between what is a repair (not taxable) and what constitutes the creation of something new (taxable) can be murky at best.
Sales Tax on Standalone Services
If you provide a service that is not connected with the sale of any tangible property, your services are less likely to be subject to sales tax. However, you still can’t take that exemption for granted.
For example, South Dakota requires sales tax on the legal fees that lawyers charge their clients. In Ohio, if your massage was not prescribed by a doctor, it is subject to sales tax. If your yoga class is held in a studio or health club in Connecticut, add sales tax. Presumably, a yoga class in the park is tax-exempt.
Most states publish lists of services that are subject to sales tax. Check with your state department of revenue for the rules relating to your services.
Charging Sales Tax on Services
The US economy has shifted away from products and towards services. As a result, states are looking for new and different ways to add sales taxes to more categories of services. Membership in a professional association can be a good way to stay on top of your sales tax obligations, as these organizations tend to stay abreast of the latest developments and let their members know about changes in relevant tax laws.
If you do need to pay sales tax on the service you provide, tax compliance software can help automate the process so you spend less time filing tax returns and more time doing what you do best.