Services - Are They Taxable?
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
The answer is yes, many services are taxable, and each year more states increase their lists of taxable services. In most cases, whether or not a service is taxable depends on the state where the service is provided, as well as what type of service it is. However, it could also depend on the facts and circumstances surrounding the transaction.
So why is there so much confusion about the taxation of services? According to Michael J. Fleming, services have historically been non-taxable, so some businesses still assume that their services are not subject to tax. Unfortunately, due to changes in the economy, states have decided to start taxing services in order to boost their overall revenue.
In this week's episode of the Sales Tax and More Podcast, Michael J. Fleming is interviewed by his co-host Ellie Moffat about the taxation of services in various states. Michael highlights the different services that are taxable, the states that tend to be more aggressive than others, and the reason why many people get confused by their taxation. Stay tuned.
Here’s a glimpse of what you’ll learn:
Are services taxable and why is there so much confusion about it?
The states that are more aggressive than others when taxing services
The services that are commonly taxed in most states
Michael J. Fleming talks about the hidden problems he sees in terms of taxing different services
Where to get in touch with Michael and learn more about Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
[0:26] Mike: Hi everyone. Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is of course sales tax. Today my co-host Ellie Moffat is going to be interviewing me about services and if they are or are not taxable, but before we get started, I want to introduce you, Ellie.
[0:51] Ellie: Hi, everyone. It's really great to be here and I'm gonna go ahead and do a quick introduction for Sales Tax and More, and then I'm going to start grilling Mike here. Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax or related needs. So we do a lot of sales tax returns, registrations, consulting, research and like our name states more if you have questions about our services, we will give you plenty of ways to reach out to us, and let's dive in here and start asking Mike these questions. So Mike, are services taxable?
[1:35] Mike: Well, before we get into that, I'm gonna get a grilling today. So, am I going to be grilled like a fish or like steak? Yeah….just kidding.
[1:46] Ellie: That medium rare sales tax filet.
[1:50] Mike: Alright, haha so we joke about my favorite answer being, it depends. And it's the same thing with services. So it depends. On the state, it depends on the actual service. And sometimes it depends on the facts and circumstances surrounding the transaction. But the short answer is yes, many services are taxable and each year, more and more states tax more and more services.
[2:21] Ellie: So, Mike, it is interesting to hear you give kind of an answer that isn't it depends, but why. So why is there so much confusion about services being taxable?
[2:34] Mike: Well, you know, unlike tangible personal property, and this is a great question, by the way, unlike tangible personal property, which by default is taxable. Services, by default, are not taxable. And historically, not very many services were taxable. You go back 25 years ago. There were a lot less services taxable then. So you've got this mindset that, you know, some people haven't checked up on this in quite a long while they've just assuming that services are no longer taxable. Other people, you know, when they read, you know, taxability rules and they see that services are not taxable by default, they think, Oh, well, that means that services are not taxable. But that's, really not true. So, you know, especially when you think about how our economy has changed, we're really a service-based economy now. And that transition has been happening in states that had been losing out on a lot of revenues. So in order to keep their coffers filled, states have moved to start taxing more services. So you know, if we look back in the past, they weren't taxable, but that's changing. So that's why there's a lot of confusion and every time we have some sort of webinar or I do an in-person presentation, someone's always telling me, very smart people telling me that services are not taxable in their state. And maybe most services are not taxable in their state, but I do not know the state out there at this point. That doesn't tax at least some services.
[4:25] Ellie: So, Mike, a really important question I think that we have here. Are some states more aggressive than others? We hear horror stories. We hear things through the grapevine, we're always seeing things pop up on news feed. So are some states more aggressive than others?
[4:42] Mike: Yeah, absolutely. And, you know, we talked about services being exempt by default unless they're specifically enumerated. So in other words, the state's got to provide you a list of the taxable services, but there are four states that do the opposite. They are taxable in less specifically enumerated, so a state like Hawaii, New Mexico, South Dakota, West Virginia, these states tax almost all services. Even when we're talking about accounting services or legal services. States like Hawaii and South Dakota are going to tax those, which is very important for people in the, you know, our industry here. If we have remote clients, and if we cross these economic thresholds, you know, in states like South Dakota, it's 200 transactions, we would have to be collecting tax on our accounting services. So some states are much more aggressive than others. Now, something else we have to worry about is that states stretch. Alright, so they look at what you sell through the prism of how they tax. So even if it's not already an enumerated service, it's not listed as taxable. When you start digging in, we find out that the states have looked at, you know, let's take Texas for example. They've looked at something as taxable for quite a while. So data processing. Let's look at that. You know, I would, it's sort of a catch-all for Texas. I would not think of website design or website hosting as data processing. Data Processing is the enumerated service. So if I'm going down a list, and this happens quite often, you know, some very smart accountants CPAs. You know, they are telling their clients so you don't have to worry about taxing website design or website hosting because it's not in the big picture. It's not in the large print when you start digging into this, you see Texas has taken the position for over 20 years that website design and hosting are actually a form of data processing and are taxable, so some states are very, very aggressive and stretching, what they do tax to fit what you're selling. Now another example of this is South Carolina. Software as a Service, they couldn't figure out a way to tax it, but you've remotely accessed someone's data. So South Carolina taxes software as a service as a telecommunication service. So it's not just the big picture we've got to look at a lot of these states really stretch their definitions and you got to look at the different rulings and guidance put out by the states.
[7:52] Ellie: Thank you so much for all of that information. I think that we're all dying to know a little bit more about services. So Mike, what are some of the more common services that are taxable?
[8:07] Mike: Well, this is going to be different state by state. But services to real property are going to be taxable in a lot of states, you know, like janitorial services, landscaping services, pest control, and even in some states snow removal. So we call these services to real property. Services related to tangible personal property. This is another one, fabrication labor is actually one of the biggest areas that I see companies getting tripped up on. Also assembly you know, dry cleaning, you know, that's a process on tangible personal property. Repairs are another big one. A lot of states will tax repair services which is a service to tangible personal property. We've got installation implementation, training, shipping, and handling. You know, those are actually services and storage services. These are some of the big ones. Now, these are not an exhaustive list, and not every state is going to say all of these services are taxable, but many do. We also have services related to computers and or software. They are often taxable. And, you know, pet services, dog walking, dog grooming, dog boarding, you know, these are some of the services that are showing up as taxable. And then we have the big ones like data processing or Information Services. You know, these are big ones in certain states, they sometimes serve as the catch-all for other services that you wouldn't normally think would fall under those categories, but then, you know, per the state, they do fit into one of those categories. And then we have security services and security services. Again, catch-all, security services maybe, you know, labor, you know, you're providing security for an event. It could be alarm services, it could be cyber security. So, security services can take a lot of forms also. But, you know, as I said, Every state is going to be different, but all states tax at least some services.
[10:37] Ellie: Thank you so much, Mike. And I just want to re-emphasize that these are, these are just some of the more common services that are taxable. This is not an exhaustive list here. So, Mike, what are some of the hidden problems that you see?
[10:51] Mike: Yeah, this is a great question. We touched on it before. One of them is not digging deep enough. So you see the big line like in Texas that website design and website hosting are not, you know taxable or they're not listed as taxable, and you don't do further digging. And this has created a big problem so much so that the state of Texas actually targets these types of companies because they know everyone has gotten it wrong. So not digging deep enough is a big problem. Same thing in South Carolina. Sometimes you gotta think out the box. I mean, you can't just stop when you know software as a service not listed as taxable. You get to look at other ways on how the state might try to tax it. That's where we find that the state of South Carolina actually taxes software as a service, as a telecommunication service. Shipping, a real big one, you know, there are some these software companies out there, you know, like Tax Jar that's going to tell you shipping is not taxable in California. But that's not the truth. That's just the big picture. I mean, we've got to look at the circumstances under which shipping is not taxable, and under which shipping could be taxable. So in order for shipping to not be taxable in California, it has to be separately stated. It has to be on a third party, you know, like a contract carrier or common carrier, it can't be in your own trust and it has to be a direct pass-through of costs. So if you're marking up your shipping, then that's going to be an issue and it could cause some or all of that shipping charge to become taxable and also handling is going to be taxable in California. So you know, if you're working for Or when you were selling through Amazon, you know, if you were charging, shipping and handling it was altogether well, you know, in order at Amazon didn't give you the ability to separate those out. So shipping should have been taxable in that instance. But you've got some companies taking a very simplistic approach to this, as we mentioned Taxjar, who's out there saying that shipping is not taxable, and that's only part of the truth, it could be taxable. And for very many sellers with the way that they do business, it actually is taxable. So not digging deep enough or just looking at the headline numbers. Another issue is not understanding how the state's defined sales tax.
[13:45] Mike: And, you know, most states you know, they don't use the exact same wording, but they talk about the same concept and California is one I know its sales price means the total amount For which tangible personal property is sold, leased or rented. Without deduction here's the important thing without deduction for the cost of property sold, material used labor or service. So a lot of companies go out there and they think that you know, hey we created this item and we're selling it and we're gonna you know charge labor to create the items separately than the materials were used to create the item. Unfortunately, it doesn't always work that way. If you're selling an item, it's all costs associated with that item. So you know, California is really big with this. They've got fabrication, labor, they've got assembly labor, and this is something that becomes an issue. They're also assuming the state doesn't charge sales tax on services, you know, California, big example. They don't charge sales tax on very many services, but they do charge sales tax on services. You know, assembly is one of them. So in California, you know, if you're putting shelves up in a store, you know, in California because of the earthquakes, you have to bolt them to the wall, you know, into the floor into the wall. And once you're permanently attaching something to real estate, there's no tax charged on that a lot of times. So, look at how granular this gets, you know, if you take the shelves, and you put them together, you assemble them, and then screw them into the wall. Well, there's assembly labor there. But if you screw the first piece into the floor or the wall, and then you attach the other pieces to that there's no assembly labor because you're making improvements to real property. So it gets real granular as to the facts. circumstances surrounding a particular transaction. California had another great example. And I'm using California because so many people say California doesn’t tax services. But services to real property. They used to have this example on their website. I'm not sure if it's there now that the CDTFA took over. But you know, someone decides that they want to buy some drapes and they take some measurements at home, they go down, they buy these drapes, and they ask the person selling the drapes to alter those drapes. And you know whether the person who's selling the drapes altered them themselves, or they sub it out to someone else, that's a taxable service because it's related to the sale of tangible personal property. Now you bring those drapes home and you hate them in the bedroom, you decide you want to put them in the game room. So you take new measurements, it goes down to the local tailor or whoever is doing alterations for you. It's the same day it's the same drapes, but now, it's not related to the sale of tangible personal property and that service is not taxable. So again very, very granular, you know, same service, taxable in some circumstances, not taxable in others, sign companies you know, I was involved in an audit, and this is similar to the to the assembly, but this is what they term fabrication labor. You make the signs out of the state. So you think you don't have to worry about shipping them in. But if you ship them in two pieces, this happens to be a big pole sign, you know, you see out in front of car dealerships, if you put the head on that sign prior to inserting the pole in the ground. That's what we call fabrication labor, however, you put the pole in the ground first. And then you use a crane to put that sign on the top of the pole. No fabrication labor because you are making improvements to real property. So just like everything else, when we start talking about taxability, taxability of services is very fact specific in a lot of instances.
[18:25] Ellie: Thank you so much, Mike. And thank you everyone for coming. Mike, do you want to wrap this up here and let everyone know how they can reach out to us?
[18:33] Mike: Yeah, we've got some webinars that we're going to be doing that a little bit deeper into taxation of services. And of course, we always have our consulting and research. Some services, you know, you don't want a quick answer. I mean, it actually needs research to answer and we provide all of those services so you can reach out to us through our website. The website is www.salestaxandmore.com or you can email Ellie directly it's emoffat@salestaxandmore.com, all spelled out. And we want to thank you for listening today and hope to see you again on some of our other podcasts and some of our webinars that we offer through the website.
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