If you followed our recent series about multi-state tax facts for various types of technology companies, you likely noticed a common theme: it’s important to determine which states a business has created in so that they know which sales and use tax laws to follow. Although it can be tricky, the good news is there are some generalities that can help get a company started with the process.
Sales and Use Tax in Regards to Services
In general, the sale of tangible property starts out as subject to sales tax, but then may ultimately be non-taxable as a result of statutory exemptions. On the other hand, services are generally non-taxable unless specifically delineated by a state’s statutes as taxable. Bloomberg BNA does a good job of describing the general rules around taxation of services.
- Most states do not subject services to sales and use tax unless a specific statute requires it.
- Recently, many states have started to expand their definitions of which services are subject to sales and use taxes.
- A common trend seen in states across the country is imposing sales tax on specific services: utilities, landscaping, property repair, maintenance and information services. Sometimes it’s difficult to determine what, exactly, is included in these definitions.
- In instances of a “mixed” transaction, where it’s not clear if the sale is for a nontaxable service or taxable tangible property, states often rely on the “true object” test. This clarifies if the buyer’s true object or intention is to receive physical personal property or receive a service.
- These tests vary by state, so companies need to know how the states they have nexus in determine the true object.
- It is generally a good idea to separately state by line item the various charges on an invoice, rather than bundling. For instance, in the case of a sale to a customer of a widget, plus the widget’s installation, it may often be the case that the widget is taxable, but the installation not – if separately stated. However, if bundled as a lump sum, most states will require sales tax collection on the lump sum. It is much harder to defend a breakout later upon audit.
- Businesses also need to take a look at the exemptions available for states in which they have nexus. Many states offer these exemptions on certain types of sales that would normally be subject to sales and use tax, such as those that are:
- Purchased for resale
- Purchased by nonprofit and government organizations
- Directly used for manufacturing, processing, mining and agriculture
- Delivered in interstate commerce
- Provided for employers by employees
Note that most of these apply to sales of tangible property, but may also come into play in the services area.
Although there are general rules of thumb, each state interprets these rules differently. Stay tuned for a future post about the taxability of services, which will provide a few examples of states’ different approaches to similar laws.
Author: Monika Miles founded Miles Consulting Group in 2002. The firm focuses on multi-state tax consulting—helping their clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.