State and Local Tax: Taxability of Services and Products
If you sell products or services at your company, you’re likely required to collect and remit sales tax. Of course, taxability varies from state to state—essentially requiring you to know the laws of each state in which you do business. If you sell goods online, that could easily mean all 50 states!
While the taxability of services and products by state can be an overwhelming proposition for the average layperson to learn, working with a qualified accountant can take a lot of the guesswork out of your business dealings. Here’s an overview of how to tell whether your goods or services are subject to sales tax, in which states and what to do about it.
What are you selling?
Your first step is to determine whether you’re selling a good or a service. Traditionally, only goods were subject to sales tax. With the growth of service-based businesses created to make life easier, however, more states are taxing this industry. (For example, Texas charges sales tax on janitorial services.)
Yet there are no blanket rules as to determine a good vs. a service or decide which services are taxed. Some states have adopted the “true objects test” to determine the difference between goods and services sales. It isn’t perfect, and not every state uses it. But it helps make it easier to differentiate between the two.
For example, you go to a shoe repair store to have your boots repaired and get a new zipper. The labor was the point of the sale, not the materials to fix them. This would be a service sale. Conversely, you visit an electronics store and the salesperson helps you diagnose your television problem. She also recommends a new cable to fix it, and you buy it. She’s selling a good, not that service.
Still more factors make taxability a complex issue. Digital items can be classified as a good or a service. It depends on how they’re created and delivered, who they were created for and how they’re used. Resale items are also a minefield of conflicting state tax laws. There are plenty of exempt items, too. Most states do not charge sales tax on prescriptions and food, but some do.
If you think it sounds confusing, you’re not alone. Sales tax on products and services is a murky area of law.
Does the state collect sales tax, and do you have a nexus there?
Next, you need to know whether your state collects sales tax (or whether you’re selling in a state that does). As of June 2020, 40 states are collecting sales tax if you have an economic nexus in that state. If you sell online and your revenue and sales volume meets the threshold for economic nexus in a particular state, you may be liable for collecting and remitting sales tax to that state. You could be selling in Florida and never set foot in California; it doesn’t matter. If you do enough business with California buyers, you’ll likely be required to send the state sales tax.
If you sell online and use a third-party marketplace facilitator, your sales tax liability may already be handled. That’s because such a facilitator is responsible for collecting and remitting sales tax on your behalf. But again, this varies state to state and facilitator to facilitator.
Do your research!
If you’re not sure what’s taxed and what isn’t in your state (and others in which you do business), research the state tax laws everywhere you sell your good or service. This is, of course, a lot of work if you’re in an industry that straddles the line between goods and services. And that work increases exponentially if you’re doing business in multiple states.
To be on the safe side, we suggest working with a CPA experienced in state and local tax matters when taxability is in question. This will help ensure that your business is in compliance with all state and local tax laws. Working with an expert provides peace of mind that you’re up to date on any new rules and regulations that will affect your business practices—and your bottom line.
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