Taxing Services in Our Intangible World

With services accounting for an ever larger share of consumption in the United States, many tax professionals are calling for states to expand their tax bases.  Traditionally, state sales taxes have applied to only tangible goods, such as cars, furniture and other tangible goods.  The world has changed though.  Today’s consumers—unlike consumers in the past—spend more on services than goods.  A few states, recognizing this, now have a broad sales tax that includes many services.  Some other states tax a very limited number of services. 

What Companies Need to Know
Companies—especially those with nationwide sales—need to be mindful of the numerous state and local sales taxes.  If companies don’t collect the sales tax, they will have to pay it and any related fines, not their customers.  Various tools and services are available to assist a company when trying to comply with sales tax laws.  We find the Services Taxation Survey (www.taxadmin.org/fta/pub/services/online/dfault_07.html) especially helpful, although we recommend confirming its information with each relevant jurisdiction.     

Companies must also consider whether equipment and materials used in the service are taxable.  Many taxing authorities have developed the “true object test” to make this determination.  Using the test, a company must decide whether the procurement was the service provided or the tangible item obtained from the service.  This test is often not as straight forward as one would hope and is often better left to an experienced sales tax expert.  

What Service Providers Need to Know
Most states consider the service provider as the end user, making their purchases subject to tax.  Some states though allow service providers to treat materials and supplies as resale inventory.  They can then invoice their customers for the materials and supplies and collect any relevant sales tax.  There are many exemptions that apply to service providers though.  Service providers should therefore consult the relevant taxing authority or a sales tax expert to know what taxes and exemptions apply to them.  

For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events.

How Can We Help? 
Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of multi-state and local tax compliance and consulting for large US and global corporations.  We use that experience to your advantage.  Contact us and we can provide a customized cost-effective solution to meet your company’s needs.  For further information on Allyn Tax services, please contact: tax@allynintl.com.