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Services Can Be Taxable, Too

Editor’s Note: This guest blog post comes courtesy of Gail Cole with Avalara.

It’s often assumed that services aren’t subject to sales tax, because in many states they aren’t. But more and more states are taxing services these days, in a trend that’s likely to continue.

There’s a good reason for that. Americans now spend less on tangible personal property (aka goods) and more on services than ever before. This started decades ago and shows no sign of slowing. The Bureau of Economic Analysis reports that personal consumption of services increased by $36.4 billion in June 2018; by contrast, spending for goods increased by a mere $1.3 billion.

What does that mean for retailers? If you sell any service, you should either scrutinize state and local tax laws wherever you sell, or have an expert do it for you.

Five states have no general sales tax, and four tax sales of most services. The taxability of services in the remaining states varies and is variable. It can also be confounding.

For example, Washington and Wisconsin both tax cleaning services but exempt janitorial services. North Carolina and Ohio tax car washing services provided by a business but exempt self-service (coin-operated) car washes. In Baton Rouge, Louisiana, customers must pay sales tax on 50 percent of the total bill for funeral services, less cash advanced, when they’re charged a lump sum that covers the entire cost of a funeral.

Determining the taxability of services sold in conjunction with products can be even tougher. When North Carolina expanded sales tax to a variety of repair, maintenance, and installation services in March 2016, and again in January 2017, taxpayers found the changes bewildering. In fact, there was so much confusion, the Department of Revenue decided to publish a notice clarifying the transition issues taxpayers were having.

Understanding how different services are categorized can help explain how they’re taxed. To learn more, check out this blog from Avalara.

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