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Learn the fundamentals of sales tax
When it comes to sales tax, the general rule of thumb has always been “products are taxable, while services are non-taxable.”
Under that scenario, if your business sells coffee mugs, you should charge sales tax for those products. But if your business creates logos for coffee shops, you shouldn’t charge sales tax for those services.
However, as with anything sales tax related, there are plenty of exceptions to this rule. Why?
- Each of the forty-six US states with a sales tax makes their own rules and laws.
- States are expanding their tax bases, and for some states that includes requiring sales tax on services that were previously non-taxable.
- The digital world is blurring the line between products and services. Is an ebook a tangible product or is the ability to download it a service? How about software-as-a-service? Each state gets to decide.
What constitutes a “service” for sales tax purposes?
Let’s take a step back and make sure we know how a service is defined. The term services encompasses a wide variety of businesses. Services are roughly organized into these four categories:
- Business services – These include services for businesses such as advertising, computer services, human resources services, lobby and consulting and payroll services.
- Personal services – These include services such as dry cleaning, hair care, and tanning salons.
- Professional services – These include services provided by accountants, architects, attorneys, and doctors.
- Maintenance and repair services – These include services that are provided to tangible personal property (i.e. cars, your house) or improvements to buildings and land (i.e. landscaping)
Which states impose sales tax on services?
While services are not subject to sales tax in all states, It’s important to note that exclusions are not absolute. It all depends on the state. Here’s a quick breakdown of the general services sales tax landscape:
- Five U.S. states (New Hampshire, Oregon, Montana, Alaska, Delaware) don’t impose any general, statewide sales tax on goods and services.
- Four U.S. states (Hawaii, South Dakota, New Mexico, West Virginia) tax services by default, with exceptions only for services specifically exempted in the law.
- In the rest of the 41 states and the District of Columbia, services are not taxed by default, but services specified by the state may be taxed.
Of course, if you do business in more than one state, that means that you need to understand how each state treats each of your particular products or services.
For example, in Hawaii, services are taxable unless specified otherwise. But in Texas, dry cleaning is taxable while veterinary services are not. Why? It’s simply because the state says so.
How to Stay Compliant with Sales Tax When You Sell Services
It’s important for every business to perform a nexus study. A nexus study reviews all your business activities and sales in a state or multiple states and determines if these activities create sales tax nexus.
You’ll want to perform a nexus study when you start selling in a new state, or when you start selling a new product or service.
For example, say you are a CPA in Arizona, where CPA services are not taxable. But you open up a second office in neighboring New Mexico. While Arizona doesn’t require CPAs to charge sales tax on their services, New Mexico does. This means registering with the state and ensuring you collect and remit New Mexico gross receipts tax (GRT, their equivalent of sales tax) at state-specified intervals. If you fail to collect from your New Mexico customers, you’re on the hook for paying New Mexico GRT out of your own profits.
Once you’ve conducted a nexus study, your next steps are:
- Ensure you are registered for a sales tax permit in every state in which you are required to collect sales tax.
- Ensure that you charge the right sales tax rates. Establish rate tables and do your product taxability research, understand jurisdictional boundaries and where those rates apply, and keep up with any changes.
- File your returns. In the states where you’re registered, be sure to know your due dates, submit your returns and remit any payments necessary.
How can I simplify sales tax compliance?
Need assistance determining whether or not your services are taxable? We recommend checking in with a vetted sales tax expert to help you conduct your nexus study and ensure that you are collecting sales tax correctly on the services that you sell.