Do I Have to Charge Sales Tax on Services?

Sales tax is a consumption tax applied to the sale of goods and, in some cases, services at the retail level. This tax is collected by the seller from the purchaser and then remitted to the relevant state or local government.

Sales tax rates and the specific items or services subject to taxation can vary significantly, not only between states but also within the same state due to additional local taxes imposed by cities or counties. Each state determines whether to impose a sales tax and sets its own rates and taxability rules. This decentralized approach creates a complex landscape for businesses, particularly concerning the taxability of services.

Understanding Service Taxability by State

The taxability of services differs significantly across states, creating a nuanced environment for businesses. While tangible goods are generally presumed taxable unless specifically exempted, services are often exempt from sales tax unless a state specifically enumerates them as taxable.

States typically adopt one of two main approaches to taxing services. Many states generally exempt services but then specifically list certain types of services that are subject to sales tax. Common examples of services often enumerated as taxable include certain repair services, cleaning services, landscaping, and telecommunications. Digital services, such as streaming or Software as a Service (SaaS), also fall into this category in some states, reflecting the evolving nature of the economy.

Conversely, a smaller number of states take a broader approach, taxing most services unless specifically exempted by law. For instance, some states consider services involving the direct use of tangible goods, like auto repair where both labor and parts are involved, to be taxable. Businesses engaging in mixed transactions, where a service is provided alongside a tangible product, must determine the primary component of the transaction, as this often dictates taxability. To ascertain the taxability of specific services, businesses should consult the official websites of state Departments of Revenue or tax agencies, as these resources provide detailed guidance and regulations.

Determining Your Taxable Presence

Even if a service is considered taxable in a particular state, a business is only obligated to collect sales tax if it has “nexus” in that state. Nexus refers to a sufficient connection or presence a business has with a state that triggers a sales tax collection requirement.

Traditionally, nexus was primarily established through a physical presence in a state. This “physical nexus” can include having an office, a retail store, a warehouse, employees, or even inventory stored within a state. Providing services in person within a state also typically creates a physical nexus.

With the rise of e-commerce and remote business operations, many states have enacted “economic nexus” laws. These laws require businesses to collect sales tax if their sales into a state exceed certain thresholds in terms of dollar amount or transaction volume, even if the business lacks a physical presence there. Common economic nexus thresholds are typically around $100,000 in sales or 200 separate transactions within a state over a 12-month period. Businesses offering services must identify where their services are delivered or consumed, as this location determines where nexus might be established and sales tax obligations may arise.

Complying with Sales Tax Obligations

Once a business determines its services are taxable and it has nexus in a state, businesses must first register for a sales tax permit with the relevant state tax authority before collecting any sales tax from customers. This registration is typically completed through the state’s Department of Revenue or tax agency website.

To register, businesses need to provide information such as their legal name, business address, Federal Employer Identification Number (FEIN), business type (e.g., sole proprietorship, LLC), and estimated sales volume. After submitting the application, businesses receive a sales tax permit number. The time frame for receiving this permit can vary but is often within a few weeks.

After obtaining the permit, businesses must accurately charge sales tax to customers on taxable services. This involves adding the sales tax as a separate line item on invoices. Businesses are then responsible for periodically filing sales tax returns and remitting the collected tax to the state.

Filing frequencies are assigned by the state and commonly include monthly, quarterly, or annually, with the frequency often determined by sales volume or tax liability. Most states require online filing and electronic payment through their tax agency portals. Maintaining detailed records of all sales, collected taxes, and filed returns is essential, as these records may be required for audit purposes and should be kept for three to seven years.