Does Your Service Business Need to Charge Sales Tax?
The tax man always gets his cut.
If your business sells clothes or shoes, you probably already know you have to collect sales tax. But, what if your business only provides a service? Do you need to collect sales tax on services?
The law on collecting sales tax on services varies from state to state, but here are some things to know:
States With No Exemptions
Hawaii, New Mexico, and South Dakota impose a sales tax on all services provided. If you live in these states, your service business is not exempt from sales tax.
Sales Tax Sometimes Applies
Some states, like California, only tax some services.
- Services that are inseparable from the sale of a product are taxable. For example, you sell water heaters and charge for installation. Since the installation charge is tied to the sale of the water heater, the installation charge, although service based, is taxable.
- No sales tax is charged when a product is only incidental to the sale of a service. Filling a cavity is a service. The gold filling that goes into the cavity is only incidental to the service. So while the cost of the gold filling may be taxable, the charge for the service is not.
- When a service creates a new product, the service is taxable. Let's consider a tailor. If a tailor hems a costumer's pants, the service is not taxable. If a tailor makes a new suit for a customer, the service charge of making that suit is taxable.
Really? That's Taxable?
Other states apply similar rules as California to tax services. Here are some surprising examples of taxable services:
- Florida: In Florida, cleaning services for nonresidential buildings are taxable. However, cleaning services for residential buildings are not taxable. Oddly, carpet cleaning services for both nonresidential and residential buildings are not taxable.
- Alabama: Alabama charges sales tax on fees that a photographer charges for services. The state considers photography services a necessary part of selling photography prints. So, the charge for the services and the prints are both taxable.
- Utah: A Utah code charges sales tax on service maintenance agreements bought in conjunction with software programs.
Since the law regarding taxes on services may be different in each state, an experience local tax attorney may be able to help you determine whether or not your service business needs to charge sales tax.