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Taxes on Services: What Your Business Should Know

As a business owner, it is important to understand your tax obligations to the government. Sales tax is one type of tax you might need to pay to uphold the laws and regulations within your state. Read further to learn more about sales taxes, the types of products and services that receive sales tax versus those that don’t, as well as a step-by-step guide to help you determine your state’s specific requirements.

 

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What are sales taxes?

Sales taxes are taxes on goods and services that are paid to the government. Most states have a certain percentage of tax that is applied to goods and services for sale. Here are the three main types of sales taxes as mentioned by Wolters Kluwer:

  • Seller (vendor) privilege taxes: Seller privilege taxes are applied to business owners by the government as a way of maintaining their right to conduct business within their state. Business owners can either pay the tax themselves or add it to the existing cost of their goods/services for their customers to pay as a part of their purchase.
  • Consumer excise (sales) taxes: Consumer excise taxes are a type of sales tax wherein a business owner acts as the median between the government and the consumer. In this situation, business owners include the state tax as a separate entity on receipts and other documents, as it is not absorbed into their products’ initial price.
  • Retail transaction taxes: Retail transaction taxes serve as a hybrid between seller privilege and consumer excise taxes. In this situation, states who use this sales tax require business owners to collect taxes and pay them to the government, while the customer has to pay the tax to the business owner when they purchase a product or service.

 

What is the difference between sales tax and use tax?

According to Investopedia, the difference between sales tax and use tax is that sales tax aims to tax products and services from a business within a specific state. In contrast, use tax can be viewed as a form of sales tax wherein a consumer has to pay sales tax for an item they bought out of state if they intend to use it in another state. This typically occurs with large purchases like cars, boats or even furniture. 

Another difference is that businesses typically collect sales tax from the consumer while the state government collects user tax from the consumer. This is to protect a residential business’s in terms of profit, should consumers make large purchases outside of the state they live in.

 

Products/services that may be subject to these taxes

Here are some examples of products or services subject to sales taxes, as mentioned by CPA Practice Advisor and. Be sure to review your state’s specific guidelines as these items vary:

  • Tangible products (Clothing, toys, books, food)
  • Digital products (e-books, apps, online games, streaming platforms, movies, music)
  • Personal services (Hair salons, dry cleaners, fitness centers, pet grooming)
  • Professional services (Law firms, healthcare organizations, accounting firms)
  • Business services (Staffing/recruiting firms, credit bureaus, consulting firms, IT services)
  • Services to real property (construction, landscaping or cleaning services)
  • Services to tangible personal property (TPP) (car repairs, device repairs, home improvements)
  • Entertainment and recreation services (Concert venues, professional sports venues, amusement parks)

 

Products/services that may be exempt from these taxes

According to Wolters Kluwer, here is a list of products that are typically exempt from sales taxes. Be sure to review your state’s specific guidelines as these items vary:

  • Prescription drugs (Birth control, anti-depressants, stimulants)
  • Product-specific exemptions (clothing brands, food brands, food products)
  • Products for resale (wholesale items)
  • Medical devices (prosthetics, machinery, tools)
  • Religious organizations (United Methodist Church, Catholic Church, the Salvation Army)
  • Non-profit organizations (Red Cross, Habitat for Humanity, Public Broadcasting Service (PBS)), 
  • Educational organizations (McGraw Hill, UNESCO, National Education Association)

 

How to find out if your state collects sales taxes

Follow this guided list of steps to help determine if your state collects sales tax:

 

1. Determine if you operate in one of the states without sales tax

According to Investopedia, the following states don’t use sales tax:

  • Oregon
  • Delaware
  • Alaska
  • New Hampshire
  • Montana

However, each state still has its own way of taxing specific goods or services. If you operate out of one of these states, be sure to do your research on what other business-related taxes you need to adhere to. If you don’t operate in one of the above states, you most likely need to pay sales tax on your goods and services.

 

2. Visit your state’s taxation or revenue department website

Conduct a search for sales tax information for business owners in your state. For example, if you own a business in Florida, search for Florida sales tax guidelines for business owners. In this case, Florida’s state government provides information about sales tax on their Department of Revenue website. Here, the website outlines the following key information for business owners:

  • State sales tax rate is 6%
  • Sales tax should be added to the price of taxable goods
  • Collect sales tax from a customer at the time of the purchase
  • Exemptions for amusement, property leasing and electricity

You may also be able to find out whether or not your business and your offerings qualify for sales tax, and if where to register for sales tax.

 

3. Review the Tax Foundation’s tax rate data

Visit the Tax Foundation’s website to get current data about sales tax rates within the U.S. and within your specific state. Each state has a state tax rate and a local tax rate, as well as combined estimates. For example, for 2020 Alabama has a state sales tax rate of 4.00% and an average local sales tax rate of 5.22% with a combined sales tax rate of 9.22%

 

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