According to Focus Economics’ recent economic forecast, the services sector is the main engine of our economy in the United States. Since service-oriented companies are such a large part of our economy, we thought it would be beneficial to look at how services are taxed in different states across the country.
Are Services Subject to Sales Tax?
When we think of sales tax, most people assume that only the sales of tangible goods are subject to it. Most state laws are written to assume that sales of tangible personal property are subject to sales tax unless there is a specific exemption (there can be many!) and laws for sales of services are written to assume that services are exempt unless specifically enumerated. So historically, while it certainly varies by state, few services were subject to sales tax.
Right now, states tend to tax only specific services. This may seem surprising, because this tax could be a huge way to increase economic revenue. There is a lot of discussion at state legislative levels to increase the tax base to include more services. While this may be true, Scott Peterson, vice president of government relations at Avalara, shares that the complex part of tax policy change isn’t the amount of money that new legislation will produce, it is balancing who will take on the tax burdens. This may be why legislation to tax services has been introduced but has not always passed. While no two states currently tax services in the same way, Avalara divides the general types of services being taxed into six categories.
- Services related to the sale of tangible personal property (TPP). This typically means services that improve or repair property such as car repair or carpentry services.
- Services to real property including landscaping and janitorial work.
- Services performed for companies and businesses fall into this category, including credit reporting agencies and telephone answering services.
- Personal services, which includes services that offer personal grooming or other types of “self-improvement”. Tanning salons and animal grooming services would fit under this category.
- Professional services including physicians, accountants and other licensed professionals.
- Amusement/recreation services is the last category. This includes admission to amusement parks and other types of entertainment.
Even if two states have tax legislation in the same category, the legislation can look drastically different between the two and the devil is always in the details. Keep reading to learn more about some specific states’ service sales tax legislation.
Potential New Service Tax In Nebraska
If bill LBB 422 is passed in Nebraska, more services would be subject to sales tax and the sales tax rate would be lowered as well. Services that would be taxed if the bill is passed include dry cleaning, interior design and investment advice. If passed, the legislation would take effect in November of this year.
Indiana Service Tax Updates
Another state that could potentially introduce service sales tax legislation is Indiana. If Senate Bill 372 is passed, sales tax would apply to most services in the state starting January 2023. This would include “any activity engaged in for another person, if the person purchases the service as the end user of the service for consideration.”
The services exempt from sales tax would include B2B transactions, government services and services rendered by an employee.
Current Service Tax Legislation In California
California does not generally collect sales tax on services, except for when the service is “inseparable from the sale of a physical product.” This can include the setup of a purchased machine or other assembly purchases. We see this frequently in the complex rules of “fabrication” labor. There are some nuances in these rules that delineate the differences between non-taxable repair and taxable fabrication.
What To Expect For Service Tax Legislation In Other States
Currently, Hawaii, New Mexico and South Dakota are the only states that tax all but specified services, as their models are more gross receipts based, so there is a lot of room for service sales tax legislation in other states. We will keep you up to date with our blog!
Do You Need Help With Your State Sales Tax Compliance?
State tax legislation is complex and varies state to state. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to ensure you meet all of your sales tax obligations. If you have questions about your tax liability or have any other state sales tax compliance questions, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
