American spending trends have been changing over the years, moving away from paying for material goods and instead choosing to indulge on services. Increasingly more Americans choose to eat out rather than buy the groceries to prepare food at home. Thanks to advances in technology, we choose to stream music and movies rather than purchasing a CD or DVD. We even are paying people to helps achieve our ideal bodies, and then turning to someone to make those worn out bodies feel better.
There’s nothing wrong with choosing to indulge in services, but it does come with some consequences. Healthcare and social services are becoming the largest employers in over 34 states, while what was once king- manufacturing- is experiencing a depressing dwindle into just 7 states.
States relying heavily on sales tax revenue to balance their budgets are being affected by the service switch, and are now forced to react. For example, North Carolina recently extended sales and use tax to services that were previously exempt, such as installation, maintenance and repair services. More surprisingly, in Washington State a service tax has been added to athletic and amusement services like martial arts. Other surprising charges include a service tax on website hosting services in Connecticut and cloud computing and video game services in Tennessee.
Yes, this is becoming a trend. For the first time in history, more states are turning to taxing services. States that rely on sales tax will have to find another outlet for revenue, which will become available in service tax. Business that provide or consume services will be hit with these services taxes, and will need to understand how it will affect sales and use tax compliance.
Stay tuned for the rest of this three part series to learn how states determine sales tax on services, how states define services, sourcing rules and how the rules are changing.
For a more comprehensive look at services taxation nationally, download Avalara’s Service Taxability by State guide to learn more about which services are taxable in each of the 50 states.
Click here to read Part 2: Defining Service Tax For Your Business
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