Under that scenario, if your business sells coffee mugs, you should charge sales tax for those products. But if your business creates logos for coffee shops, you shouldn’t charge sales tax for those services.
However, as with anything sales tax related, there are plenty of exceptions to this rule. Why?
Let’s take a step back and make sure we know how a service is defined. The term services encompasses a wide variety of businesses. Services are roughly organized into these four categories:
While services are not subject to sales tax in all states, It’s important to note that exclusions are not absolute. It all depends on the state. Here’s a quick breakdown of the general services sales tax landscape:
Of course, if you do business in more than one state, that means that you need to understand how each state treats each of your particular products or services.
For example, in Hawaii, services are taxable unless specified otherwise. But in Texas, dry cleaning is taxable while veterinary services are not. Why? It’s simply because the state says so. We have a full guide to service taxability by state in this blog post.
Sales tax is complex, and always changing. But staying up to date on sales tax news is crucial for businesses. Sign up to stay on top of changes that can impact your sales tax compliance.
It’s important for every business to perform a nexus study. A nexus study reviews all your business activities and sales in a state or multiple states and determines if these activities create sales tax nexus.
You’ll want to perform a nexus study when you start selling in a new state, or when you start selling a new product or service.
For example, say you are a CPA in Arizona, where CPA services are not taxable. But you open up a second office in neighboring New Mexico. While Arizona doesn’t require CPAs to charge sales tax on their services, New Mexico does. This means registering with the state and ensuring you collect and remit New Mexico gross receipts tax (GRT, their equivalent of sales tax) at state-specified intervals. If you fail to collect from your New Mexico customers, you’re on the hook for paying New Mexico GRT out of your own profits.
Once you’ve conducted a nexus study, your next steps are:
Managing all the moving parts of sales tax can be challenging. Are accounting services taxed? What about hair care or car maintenance? They may not be taxed in your state today, but sales tax laws change all the time. TaxJar makes it easier for you to stay current with it all, especially as you scale your business across states.
If you need to charge sales tax on services, TaxJar takes all of these state laws into account and makes your job simple. To learn more about TaxJar and get started automating your sales tax compliance, start a free, 30-day trial today.