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Product Taxability

The Murky Business of Services Taxability

by Kristen Cooper

As with most things sales tax, services taxability can be a gray area. When the U.S. first introduced sales tax in the 1930s, physical goods were the focus and services weren’t part of that early legislation. Fast forward 90 years and the landscape is a little different. Services are now a big part of the U.S. economy and many states are now collecting sales tax.  

What constitutes a “service”?

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:

  1. Business services – These include services for businesses such as advertising, computer services, human resources services, lobby and consulting and payroll services.
  2. Personal services – These include services such as dry cleaning, hair care, and tanning salons.
  3. Professional services – These include services provided by accountants, architects, attorneys, and doctors.
  4. 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. 

Not at all confusing.

How to stay compliant  

  • Check in with every state where you do business for current sales tax status. 
  • Determine where you have liability and register in those states. To stay on top of the collection and remittance of sales tax, you’ll need to understand where you have and where you are approaching economic nexus thresholds.
  • 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.  

For more information on how to leverage technology to manage sales tax and maintain compliance, download our free guide. How to Evaluate a Sales Tax Software Solution.

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