When to charge sales tax on services in the US

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Tax

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  1. 导言
  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 grocery items and medical items. In addition, many 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 to 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 a service for sales tax purposes. While the term “services” covers a wide range of activities, services are generally organized into four categories:

  • Business services: These include common businesses services such as computer services, financial services, advertising services, and consulting services.
  • Personal services: These include 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, attorneys, and medical professionals.
  • Property services: These include services that are applied to physical goods, such as installation or repair services, as well as services to real property, such as cleaning, landscaping, painting, pest control, and construction services.

When to charge sales tax on services in the US

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

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

We recommend reaching out to the state tax authority or a sales tax expert for guidance for your business.

How to collect sales tax on services in the US

Before you collect any sales tax from your customers, ensure you are appropriately registered with the 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 you collect sales tax from your customers, you will file a tax return and remit the tax you collected to the correct state. Each state’s tax authority website will have details on how to file and your due date. Due dates vary, and the frequency with which you file a return may also vary. In general, large companies with a higher tax liability will often file more frequently (monthly), and smaller companies might only be required to file bimonthly or quarterly returns.

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