When to charge sales tax on services in the US


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  1. Introduction
  2. What constitutes a service?
  3. When to charge sales tax on services in the US
  4. How to collect sales tax on services in the US

In the US, most physical goods are taxable, with a few exceptions, such as food and medical items. In addition, many US states also consider digital goods and other SaaS offerings to be taxable. Until recently, the majority of states did not require businesses to charge sales tax on services. However, with states looking to generate more tax revenue, this has changed.

In this article, we'll focus on service taxability, including defining what a service is and when businesses operating in the US should charge sales tax on services.

What's in this article?

  • What constitutes a service?
  • When to charge sales tax on services in the US
  • How to collect sales tax on services in the US

What constitutes a service?

We all know what a service is, but it's important to define what is considered to be a service for sales-tax purposes in the US. While the term "services" covers a wide range of activities, they are generally organised into four categories:

  • Business services: These include common business services, such as computer services, financial services, advertising services and consulting services.
  • Personal services: These include a variety of services, such as salon and spa services, childcare, pet care and education services.
  • Professional services: Not to be confused with business services, these include services performed by accountants, architects, engineers, lawyers and medical professionals.
  • Property services: These include services that are applied to physical goods, such as installation or repair services, as well as property services, such as cleaning, landscaping, painting, pest control and construction services.

When to charge sales tax on services in the US

Not all US states require businesses to charge sales tax on services. Here's a brief breakdown of state service taxability:

  • There are five US states (Alaska, Delaware, Montana, New Hampshire and Oregon) that do not have a state-wide sales tax, meaning that services are not taxable in those states.
  • Four US states (Hawaii, South Dakota, New Mexico and West Virginia) tax services by default, with exemptions listed for certain services.
  • The remaining US states do not tax services by default, but tax certain services as listed in state sales tax law.

We recommend that businesses contact the state tax authority or a sales tax expert for guidance.

How to collect sales tax on services in the US

Before collecting any sales tax from customers, businesses should ensure that they are properly registered with the relevant US state tax authorities. In the US, businesses must register for sales tax permits with each individual state in which they have physical or economic nexus.

Once businesses have collected sales tax from their customers, they will file a tax return and remit the tax that they have collected to the correct state. Each state's tax authority website will have details on how to file, as well as the due date. Due dates vary, and the frequency with which businesses must file a return may also vary. In general, large companies with a higher tax liability will often file more frequently (monthly), and smaller companies may only be required to file bi-monthly or quarterly returns.

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