Do Your Services Require Sales Tax?

Sales tax is one of the largest sources of state revenue and with state and local governments struggling to fill cash flow gaps during a down economy they are voting in increases not only on goods but on services that are to be subject to sales tax. There’s truly a hodgepodge of laws and taxing authorities: according to the National Retail Federation, 45 states and 7,500 cities, counties, and jurisdictions impose sales taxes.

Changes are being made across the United States to tax services of the following types of businesses: those selling professional services, construction contractors, maintenance, and janitorial services, of which pressure washing is considered to be a part.

North Carolina recently passed a law requiring taxation of servicing contracts of tangible personal property. It is said to include businesses like construction contractors and maintenance services.

Many states are adding sales tax to services when they are in conjunction with goods sold (e.g., computer and maintenance, swimming pool and pool cleaning, construction materials, and installation, repair, and upkeep.) States such as Delaware, Hawaii, New Mexico, Texas, South Dakota, and Washington already tax many services, and others, like Minnesota and North Carolina, are actively looking to expand service taxability.

In Minnesota, the following services are a sample of taxable services. Source: Minnesota Department of Revenue, Minnesota Department of Revenue publication.

• Admissions fees to exercise facilities and places of amusement
• Building cleaning and maintenance
• Delivery of aggregate material
• Detective and security services
• Fabrication labor

So if you work in Minnesota go ahead and check into this now. Failing to know about sales tax, the rates, and rules for the correct product and service is a potentially costly error. States regularly change product and service taxability rules, businesses that provide services alone cannot make assumptions about the taxability of services they provide, nor can they assume which rate to charge. This is particularly true for multi-jurisdiction service providers. Given that sales tax isn’t the focus of most service-based companies, the risk is high. Whether a service is taxable or not in your state is hardly an open and shut case. The universe of taxable services continues to expand while the universe of exempt services continues to shrink.

The connection that triggers a sales tax collection obligation is called a Nexus. Nexus means sufficient contact with or activity within this state, as determined by state and federal law, to require a person to collect and remit sales and use tax. Yet knowing if your company has nexus can be difficult. And even if you do not have nexus in your state other activities like traveling to another state for business or online sales of services can change your nexus.

Determine whether the state in which you work, that you have nexus, defines certain services as taxable. In Texas, for example, janitorial services are taxable. Generally, tax is due on the entire amount charged for a taxable service, including items such as labor, materials, and mileage charges, even if separately listed on an invoice. So do janitorial services expand over to exterior cleaning? When I think of janitorial services I think of a maid or crew coming in to clean a home or business. I did find this from the Texas State Tax office:

Taxable Services – Real Property Services

“Pest control and extermination, garbage and other waste collection or removal, janitorial and custodial services (including parking lot sweeping or cleaning), landscaping and lawn maintenance (including tree surgery and plant leasing) and surveying.”

Personal Services

“Services such as laundering, dry cleaning, carpet cleaning …. are taxable personal services.”

I spoke with a sales tax rep from Texas and he stated that janitorial services cover any and all cleaning that would include any exterior washing, window washing, etc. So it sounds to me that any of you in Texas should be collecting and submitting sales tax.

North Carolina recently passed a law requiring the taxation of contracts servicing tangible personal property. Examples include:

• In-ground pool warranty contracts
• HVAC service contracts
• Extended warranties for airplanes
• Laptop repair contracts

There a service is taxable based on an associated purchase of a product not just on the service itself. Many states call this the True Object test. If the service is not a part of the main purpose of the transaction (purchase of the true object) then it may not be taxable. However, if the main purpose of the transaction (purchase of the true object), and only secondarily the services provided to support those goods, then the entire transaction is subject to sales tax. For example, if you are paid to clean a pool years after it was built and not as part of a service contract the customer had with the builder you may not have to collect sales tax. But if a company that builds pools has a yearly cleaning built into the contract that has hired you to perform the cleaning then sales tax should be collected. For companies servicing installation contracts, technical support, or other business services, sales tax can become a problem if not understood completely.

I suggest that even if you have never heard of anyone in your line of work having to pay state or local sales tax you contact your State Revenue office at least once a year to be sure there have been no changes that could affect you. Nothing could be worse than to have the state come and fine you, revoke a state business license, or at worst close your business for failure to file and pay taxes.