Although many believe that services are exempt from sales and use tax, only a few states exempt all services. On the other hand, only a few states actually tax all or almost all services consistent with the imposition of their gross receipt tax. When determining the taxability of services, the biggest compliance challenge for most businesses is dealing with the majority of states that fall somewhere between the two extremes.
Presumption of taxability or non-taxability of services
Consistent with general sales and use tax theory, the sale or use of tangible personal property is presumed to be taxable unless specifically exempted by statute; on the other hand, services in most states are presumed not to be taxable unless they are specifically identified in statute as taxable. What this means for most states is that if the statutes don’t specifically say that a service is taxable, then in theory it won’t be. In the few states where services are presumed to be taxable, it is important to keep in mind that services in those states would follow the same taxable default rule as tangible personal property unless they are specifically made exempt by statute. In other words, in these taxable service states, a service isn’t exempt just because it isn’t identified in the statutes as taxable. The only exempt services in these states are those that are specifically identified as exempt. Listed below is a breakdown of the presumptions applicable to the forty-six taxable states:
- Presumed “Taxable” Service States (4) – HI, NM, SD, WV
- Presumed “Non-Taxable” Service States (42) – AL, AR, AZ, CA, CO, CT, DC, FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MO, MN, MS, NC, ND, NE, NJ, NV, NY, OH, OK, PA, RI, SC, TN, TX, UT, VA, VT, WA, WI and WY
Five Main “Service” Categories
Even though there are hundreds of different types of services that can possibly be identified, most services can be categorized in one of five service categories:
- Stand-Alone (Professional and Non-Professional) Services
Services that involve the use or exchange of knowledge, expertise or ability that is not usually associated with tangible personal property even though there may have been an inconsequential exchange of tangible personal property. The primary objective of these services is to acquire or benefit from the knowledge, expertise or ability offered and not the transfer of tangible personal property. Some examples include legal, accounting, architectural, and consulting.
- Tangible Personal Property Services
Services that are performed directly on tangible personal property in some form or another. In performing services related to tangible personal property there may or may not be a transfer of other tangible personal property, and if so, the transfer of tangible personal property may or may not be separated on an invoice. Common examples include equipment repair and installation.
- Real Property Services
Services that are performed directly on real property (i.e., land, building or other structure) in some form or another. In many cases, the provider of the real property service is deemed to be the consumer of the tangible personal property that they use in performing or carrying out their real property service. Some examples include trades such as electrical, air-conditioning and heating, drywall, roofing, masonry and painting.
- Bundled Services
Separately identifiable service that is combined together with tangible personal property and sold at a single price. Some examples include maintenance, service or warranty agreements, where tangible personal property and services are included.
- Digital and Informational Services
Services that involve the compilation of information and digital images. Some examples include informational databases, performing data processing type services, online training, electronic security surveillance and music piping.
Perhaps the biggest mistake that companies make relative to the taxability of services is to embrace the notion that all or almost all services are non-taxable. It is advantageous for both “service providers” and “purchasers of services” to have a reasonable understanding of the taxability rules associated with services in the states and localities that they are located in.
Please reach out to your Wegner CPAs tax specialist if we can assist you in addressing sales/use concerns and related tax issues.