Do I need to charge sales tax on my services?
- Small Business
- Aug 15, 2018 | Mike Plaster
Historically, most states have exempted services from sales tax, and for an understandable reason: When states first began to levy these taxes around 1930, people spent more of their money on tangible goods than on services.
According to the Bureau of Economic Analysis, however, those numbers began to shift significantly about 20 years later. The amount people spent on goods kept falling, while the amount of money spent on services continued to grow higher. Today, services account for more than 60 percent of spending.
More business is good news for service providers, of course. But in many states, it also means that their typically steady stream of sales tax revenue is shrinking — leading some of those states to change their tax laws regarding services.
Do you have to collect? It pays to check.
Do you know whether your service is subject to sales tax? It’s a good idea to check in every state where you do business, because laws vary. For example, dry cleaning is subject to sales tax in Iowa, but not in Idaho. The same goes for haircuts.
And you can’t assume you’re exempt even if you’ve never had to charge tax before, because laws change, too. A new law that just took effect in Kentucky adds several different services, such as veterinary care, landscaping work, and campsite rentals, to the list of those that must charge a 6 percent sales tax.
States won’t try to hide these obligations from you — new laws often are accompanied by an education campaign. But you still have to pay attention.
Of course, if you use Avalara to stay in compliance with tax requirements, you’ll always be on top of legal changes, since automation takes the guesswork out of your sales tax process. The Avalara website also has a guide on services and taxes, along with a whitepaper featuring tips to follow. Here are a few highlights from the guide:
General categories of taxable services
Even though taxes vary by state, there are six general types of services that can be subject to sales tax:
Services to tangible personal property — For example, improvements or repairs to your property, such as a car or appliance.
Services to real property — This category includes work done on buildings and land, like landscaping or janitorial services.
Business services — These are services performed for businesses, such as telephone answering, credit reporting, etc.
Personal services — Grooming (for both humans and pets), tanning, and other services fall into this category.
Professional services — Legal work, medical care, accounting, and other services in this category often are not taxed.
Amusement/recreation — Many states tax admission to amusement parks and events such as concerts, professional sports, etc.
Beware of goods-and-services traps
Some services can be taxable based on the tangible product they’re associated with, particularly if you sold the product. For example, say you sell a dishwasher and also sell installation services and an extended warranty. Depending on your state, the installation and warranty might be subject to sales tax.
In other instances, if you provide a service in conjunction with a tangible product, but the product is secondary or incidental, the service might not be taxable at all.
Confusing? It certainly can be, which is all the more reason to have a trusted, experienced resource to guide you through the challenges of sales tax. It’s easy to get in touch with Avalara to talk about how they can help your business.