Do You Charge Sales Tax on Labor in Arkansas?
Understand Arkansas sales tax rules for labor. Clarify when services are taxable or exempt and how to invoice properly for compliance.
Businesses operating in Arkansas must navigate specific rules regarding sales tax, particularly concerning labor and services. Understanding these nuances is important for compliance.
Understanding Labor and Sales Tax in Arkansas
Arkansas imposes a gross receipts tax, known as sales tax, on the sale of tangible personal property and certain enumerated services. Labor for services like installation or repair is not universally subject to sales tax. The Arkansas Department of Finance and Administration (DFA) distinguishes between labor that results in the sale of tangible personal property and labor considered a separate, non-taxable service.
If labor is part of a transaction involving the sale of tangible personal property, it may be taxable. If labor is performed as a standalone service, it may not be subject to sales tax unless it falls under a specifically enumerated taxable service category. This distinction depends on whether the labor is an integral part of creating or transferring a taxable item or if it is a separate service.
Taxable Services and Activities
Certain services and activities in Arkansas explicitly include the labor component as part of a taxable transaction. The state defines specific enumerated services subject to sales tax. These include repair services where the labor is inseparable from the sale of a repaired item. For example, the repair of farm machinery and equipment, including both parts and labor, is taxable.
Labor can also become taxable if it is part of a bundled transaction where taxable and non-taxable products or services are sold for a single, non-itemized price. If any part of the bundled transaction would be taxable if sold separately, the entire charge may be subject to sales tax. This applies to services like the initial installation, alteration, or repair of certain items like furniture and office machines. Project management services are also taxable.
Exempt Labor and Services
Many types of labor and services are exempt from sales tax in Arkansas. Professional services, personal services, and certain installation services are not subject to sales tax if the labor is clearly distinguished from any materials used. For example, the initial installation of mechanical or electrical equipment into a newly constructed or substantially modified building is not a taxable service. This exemption distinguishes new construction labor from subsequent repairs or installations in existing structures.
Labor for the initial installation, alteration, or repair of non-mechanical, passive, or manually operated components of buildings or other real estate improvements is exempt. Services like painting an entire home or installing flooring in a remodel may not be taxed on the labor component. Services such as moving a client’s furniture or reconfiguring existing furniture within a current location are not taxable, unless they are part of a replacement of existing furniture. Design charges are not taxable.
Invoicing for Combined Services and Goods
When a transaction involves both taxable goods (materials) and non-taxable labor or services, proper invoicing is crucial for compliance. Businesses should clearly itemize charges for materials, which are taxable, and charges for labor, which may be exempt. Separately stating these components on an invoice helps ensure that sales tax is applied only to the taxable portion of the transaction.
Failing to itemize can lead to the entire charge being treated as taxable, even if a significant portion of the cost is for non-taxable labor. Documenting these transactions with clear breakdowns is important for compliance. If a business sells and installs tangible personal property, and the installation charges are included in the total sales price without separate itemization, the entire amount may be subject to sales tax.