Service Tax Rules By State

Consumers are no longer indulging their hard earned money on physical goods, but rather putting that money towards services, like dining out. There are manydifferent types of services that are available to consumers, from business services and professional services, to personal services and repair and maintenance services. In our last post of this series, we took a look at each different type of service that your business may be offering, and which states are known for putting a tax on it. Once you’ve determined whether your state is taxing your service, you’re ready to move onto the next step.

Sourcing Rules

There are two different sourcing rules that states apply to services that will help you to determine the proper rate to apply to the transaction. The first rule is the location where the service was performed, and the second is the location where the benefit of the service is received.

In most cases of personal services and repair and maintenance services, the location will stay the same like salon services or a car repair shop. However, business and professional services can often cross state lines, which is when service taxing can become complicated.

Each state can tax based on different rules. For example, what do you do when the business providing the service is located in a state that taxes based on where the service is performed, but the individual receiving the service is located in a state where tax is based on where the benefit is received? These kinds of complicated situations are where audits can arise.

States Changing Rules

States that once had a steady revenue coming from taxes on purchased goods are now having to extend those taxes to the more frequently purchased services. However, no one wants to pay extra for something that was never taxed before. This has inevitably brought some pushback, like in Washington D.C. when service tax was extended to yoga services in 2014. A huge group of people protested that move by performing the warrior pose on Freedom Plaza. Similarly, in Missouri, a political action committee tried to introduce a constitutional amendment banning the taxation of professional services.

Despite this hard pushback from consumers and businesses, states continue to broaden the scope of taxes on services:

Now that we have covered the increasing rate of service taxes, determining service taxes, defining them and sourcing rules, it’s time to check out Avalara’s free Service Taxability by State guide to find out the exact rules in your state.

There is no one-size-fits-all and you have to do some research to find the best ERP solution for you. Read more here.