Need to Collect Sales Tax
Determining if you need to collect sales tax is one of those headaches for businesses, especially those that provide services and operate across state, county/parish or metro lines.
For retailers, it’s pretty basic to learn what tax rate you need to charge for goods sold and where to pay the tax. But if you’re in the service business, knowing if you need to charge a sales tax and how much to charge individual customers sometimes can feel like you’re tackling a college astrophysics exam.
Here are three tips to help you determine if you need to collect sales tax:
Know Your Service Category
While many states will collect sales tax on services conducted in conjunction with goods sold (think a mechanic who sells you parts and installs them), those same states frequently exempt “pure” services, such as legal or artistic services. To get a better understanding of where your service falls, consider these four standard service classifications:
- Professional Services: These normally tax-exempt services are deemed to be those where the party is sharing their expertise with the customer, such as legal, medical, accounting and marketing services.
- Tangible Personal Property Services: These are the most commonly taxed services. They can range from installation to repair to maintenance or even inspection of personal property.
- Business Services: While these are similar to professional services, they are considered less highly specialized and more frequently are taxed by states or local entities. This category covers such fields as engineering, human resources, and data processing.
- Real Property Services: Though the sale of real property (land, buildings, fixtures, etc.) generally is exempt from sales taxes, many services associated with real property are subject to sales taxes. Some states will exempt services on residential property while taxing the same service on a commercial property. Often new construction labor is exempt (though goods sold by the contractor are taxed), while remodeling services are taxes.
Separate Goods and Service When Invoicing
While it’s sound accounting practice to split goods and service when invoicing your customers, it’s also beneficial to customer relations. When customers see in black and white that you are charging a sales tax on a service, they will understand that tax is required by the state and not a deceptive collection on your part. The more transparency you can provide to your customers, the better your long-term relations.
Separating goods and service also may be necessary when you operate across state or local jurisdictional lines as some services may be taxed in one state and exempt in another, so your accounting will be more fluid if goods and services already are divided.
Apply the True Object Test
One method used by states in determining when services are exempt or taxable is the “True Object Test.” The states take the following into consideraTION:
- If the primary purpose of a business is to sell a product to a consumer and provides service as a secondary item to encourage the sale, then the entire transaction will be subject to sales tax.
- If the business’s primary purpose is to sell the service and providing a good is secondary, then taxability may be determined separately.
A More Precise Answer
While these tips can go a long way to determining whether your service business is taxable, if you provide your service over multiple taxing districts, you still will have the headache of deciding if your service is taxable and at what rate in each jurisdiction.
The simple answer would be automating your invoicing services through an application that does all the heavy lifting. Contact us to learn how sales tax automation software can determine your tax rates easily on each transaction and stay abreast of ongoing tax changes, saving you the concern that you are not complying with tax collection.