Services are not all created equally … well at least not in the eyes of state and local tax laws.
Not only does each state approach service taxability differently, but in the cases where services are taxable, they are taxed uniquely according to the type of service. So if you’re a service provider, it makes sense that your taxes are at the bottom of the things you look forward to doing this season.
But what if sales tax compliance didn’t have to be such a draining endeavor?
Read on to find out why sales tax on services is such a complex topic and see how it can all be simplified.
Identifying taxable and non-taxable services
Identifying taxable and non-taxable services in the US begins with digging into the specific state laws where you provide your services. Because your sales tax nexus is not solely about the state or the service rendered but rather about the unique combination of the two.
But generally, services are split into rather clear divisions that make it easier to regulate. These are:
- Personal services
- Professional services
- Maintenance and Repair services
- Installation services
- Recreational services
- Transportation services
While professional services are exempt in most states, as they help other businesses provide taxable services or products, it’s still a state-by-state topic and not a general rule of thumb that exempts all professional service providers.
Sales tax on other services is imposed differently in each state as well, with some taxing specific services while others don’t, and vice versa. Some only charge sales tax when services are sold in conjunction with physical goods. Others only tax services if the main transaction was taxable goods.
In Which States Are Services Taxable?
41 states, including the District of Columbia, tax services according to local and state legislation, with each jurisdiction applying its own regulations for taxability. From service type to economic threshold, you need to be aware of the unique triggers that could create a sales tax nexus in the state you’re providing services.
In Washington State, for example, professional services are generally not taxable, but some services such as construction and car washes are taxable.
But some states approach service sales tax in a more generalized approach to service taxability.
In the following five states, there is no sales tax so all services are exempt by default, offering valuable relief to service businesses:
- Alaska (state level)
- Delaware
- Montana
- New Hampshire
- Oregon
In contrast to that relief, the following four states tax all services by default, excluding only services that are exempt by law:
- Hawaii
- New Mexico
- South Dakota
- West Virginia
The Internal Revenue Service (IRS) provides a rather intricate guide to taxable services as well, focusing especially on the form of payment. For example, the IRS generally deems bartering taxable as well as income received in the form of money, property, or services.
And these are only traditional services. Digital services are a whole other cookie to crack.
How does US sales tax on digital services differ from other services?
The lack of federal-level sales tax on digital services means that individual states are responsible for building their own framework. So while approximately 30 states levy their sales taxes on digital and electronic services, few states tax digital services across the board by default.
The reason for the great divide between digital service sales tax laws is that these products and services simply don’t fit tidily into existing state sales tax definitions. So when it comes to digital services and SaaS taxability, it’s an ongoing journey that service providers need to stay on top of to ensure they remain compliant as the laws change.
Staying on top of each state’s regulations and the complexities of sales tax on digital services isn’t a simple matter at all. That’s why sales tax compliance software is so important.
Implementing sales tax compliance software for a simplified journey
Complyt is a sales tax automation tool that allows you to do away with the complexities of multi-jurisdictional sales tax laws, simplifying the journey on one accessible dashboard.
With Complyt, you get to:
- Meeting tax due dates and audit deadlines easily
- Manage tax records and exemption certificates efficiently
- Stay compliant with rapidly changing tax laws in every state
- Reduce human errors and do away with chaotic filing systems
- Save time and money while protecting your business from exposure
Sales tax complexities shouldn’t keep you from expanding into new territory. And with Complyt keeping you compliant every step of the way, it won’t.
No more manual tax calculations. No more guesswork and hoping you’ve charged sales tax correctly. Just simple integration into your existing operational infrastructure to offer you peace of mind from day one.
Get in touch with our team to see how we can put compliance back at the top of things to do without taking the smile off your face.
