t s u J t o N : s e x a T e s r o e l a m y S n A s t e g d i For W

Sponsored by Avalara, Inc.

Copyright 2013

Widgets

In the sales tax world, tangible, touchable, moveable items are known as tangible personal property or more commonly, by the acronym TPP. Remember back in Accounting 101 when Professor Wingtips called a tangible, touchable item a widget?1 Widgets can be seen, sorted, lifted, loaded, displayed, delivered, assembled and even weighed. In the retail marketplace, an exchange of currency for a widget is a taxable sale. This fact is unchallenged by conventional wisdom. When a widget changes hands, consumers and businesses intuitively recognize that a sales tax-able transaction has occurred. Money goes one way; a widget goes the other way. Since the Depression-era birth of the modern U.S. sales tax system, widgets have been squarely in the crosshairs of the taxman.

Widgets versus Services

Services are a class of things we pay for that, frankly, arent widgets. Broadly speaking, services can include charges for time, effort, tasks completed or a combination of all three. Unfortunately for businesses hoping to comply, treatment of services for sales tax lacks the seeming clarity that is found with widgets. In the post-progressive 1930s and 1940s, the emergence of U.S. labor unions and the lingering progressive emphasis on free labor made a tax on the labor of another (services) a hard sell. Political difficulties arose from the perception that a sales tax on services amounted to a tax on labor. That perception has kept services from being a sales tax target for politicians for decades. As a result, nearly every state began its sales tax journey with a blanket exemption for services.

An unnamed article considered for purposes of hypothetical example. Merriam Webster Collegiate Dictionary, 2005.

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How a Service gets taxed like a Widget.

Some scholars suggest the explosion of services in the U.S. economy is partially due to the broad exemptions services have held for years.2 Over the intervening decades, the states have adopted more and more services as taxable, but the movement has been inconsistent. States like California and Nevada tax very few services, while states like Hawaii, South Dakota and New Mexico tax almost all services. The process of adopting taxable services begins with state legislative action, usually spurred by fiscal pressure. The taxation of services has historically been scattershot and the legislative process to make services taxable is tedious. But once services are deemed taxable by state law, the states administrative bureaucracy begins its interpretation of the state law, evidenced by regulations, letter rulings or other public-facing documents. Next, auditors and other revenue officials apply the laws, regulations and other guidance to individual cases. Finally, state courts or administrative forums are called upon to render decisions when these judgments are questioned. The process of establishing taxable services is a grinding political process where special interests often apply pressure for preferential treatment. That pressure often results in a sales tax landscape rife with quirks, exceptions, unique definitions and mismatched rules across the many states and home rule localities. Besides the current fiscal crisis faced by many states, something important has changed in the intervening decades: consumption of services has increased sharply. In the four decades since 1970, the average American household spending on services has increased to nearly 50% of total consumption.3 Based on a 2009 estimate, potential revenue from the taxation of consumer services could top $87 billion annually.4 With this realization, combined with the extreme fiscal conditions currently faced by state and local governments, the states have steadily increased their focus on services as a way to shore up a declining sales tax base.

In the four decades since 1970, the average American household spending on services has increased to nearly 50% of total consumption.

Merriman, David & Skidmore, Mark. Did Distortionary Sales Taxation Contribute to the Growth of the Service Sector? 53 Natl Tax J. 125 (2000). Fox, William F. The Ongoing Evolution of State Revenue Systems. 88 Marq. L. Rev. 2004. 4 Mazerov, Michael. Expanding Sales Taxation of Services: Options and Issues. Ctr. For Budget Policies and Priorities. Aug. 10, 2009.
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Taxation of Services in a Sales Tax World Built for Widgets

Weve established that in reaction to current economic trends and conditions, the states have expanded their classes of taxable services. Not surprisingly, the expansion of services subject to tax has not progressed uniformly across the states or even within any single state. However, that has not dampened state legislative enthusiasm to increase the types of services subject to tax. Sales taxes on some form of services or another have found universal appeal among the states. That said, are sales taxes on services fundamentally different from traditional sales taxes on widgets? After all, a transaction takes place, sales tax is applied and folks go their merry way, right? From a purely administrative point of view, sales taxes on services dont present additional challenges beyond those already faced by widget retailers. Sales taxes on services rarely require new forms or new licenses; service providers must meet similar filing obligations as widget sellers, and service providers must also adhere to existing guidelines for rates, boundaries and local reporting. Collecting, filing and remitting sales taxes on services are not materially different from the processes related to sales taxes on widgets either. So whats the big deal? The primary concern for most service providers amounts to one basic question: Are the services I sell subject to taxation? Unfortunately, as we have learned, states and localities vary widely in their approach to the taxability of services. For a service business, the best place to start is to develop a general understanding of how sales tax law categorizes services in their field as taxable or exempt.

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Sales Taxes in Traditional Service Fields

Repairs, Property Maintenance and Personal Services are three traditional service fields that receive diverse treatment in some states. Repair Services. Widgets sold by repairmen in the completion of their repair work have been subject to sales taxes for decades. Nowadays though, a repairmans charges for labor and skill are also subject to tax in many states. The knowledge that a state may or may not tax repairs is not always enough to make an informed decision on the taxability of the services provided. For example, in Connecticut, charges for repairs on almost anything are taxable5, except for repairs on residential buildings. In Connecticut, a residence can have up to three dwelling units or it can be any size house owned by a housing not-for-profit6 organization. In addition, repair businesses must refer to additional Connecticut law to decide if the not-for-profit qualifies for the exemption.7 In other states, the dividing line between taxable and exempt repairs may be even blurrier. For example, in Louisiana, repairs to moveable property are generally taxed, while repairs to immoveable property are not.8 While the common usage of the terms immoveable and moveable might indicate actual portability, Louisiana law defines immoveable property as tracts of land, with their component parts.9 Presumably, moveable property is everything else.

NYCRR 5541.1(d) NYCRR 528.7(a)(2) 12 Tex. Tax Code Ann 151.0101(a)(13) 13 Tex. Tax Code Ann 151.0048(b-1) 14 Me. Rev. Stat. Ann. (1)(J) 15 Minn. Stat. 297A.61, Subd 3(g)(6)(viii)
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Property Maintenance Services. Charges for real property maintenance are taxable in many states. These services include regular upkeep like cleaning, painting and repairs on buildings and grounds. Businesses that provide property management services often bill their customers using hourly fees or set rates. However, the states often carve out unique types of activities for taxable or non-taxable treatment. For example, in New York all property maintenance is taxable10 unless the property is used for farming or horse boarding.11 Of course, New York City sales taxes still apply if your customers horse farm happens to be in Manhattan or Queens. In Texas, property maintenance is taxable12 unless your customer is a landman and [the maintenance service] is necessary to negotiate or secure land or mineral rights. 13 Personal Services. Charges for a haircut, a massage, a home health aide or even a tattoo are within the reach of some states sales tax laws. For example, in Maine, visiting home health aide fees are taxable if the patient is autistic, but not taxable if the patient has a broken leg.14 On the other hand, a masseuse in Maine does not charge tax, but the same masseuse must collect tax in Minnesota, unless the patient has a prescription.15 For tattoo artists, the rules are a little simpler: new ink wont be taxable in Maine or Minnesotatattoo artists are not required to collect sales tax on their artistic creations in either state. Other traditional services such as linen services are a perfect example of a service long considered outside the scope of sales tax, but actually taxable one way or the other in many states. But these examples cover only traditional services. There is a whole class of services that have skyrocketed into existence that are non-traditional, such as computer software services, consulting, information services and software-as-aservice. Even these are now targets for sales and use tax consideration. But non-traditional services are a story for another day.

le b a x a T Non

Conn. Gen. Stat. 12-407(a)(37)(CC) Conn. Gen. Stat. 12-407(a)(37)(l) 7 Conn. Gen. Stat. 12-412(29) 8 La. Rev. Stat. Ann. 47:301(14(g) 9 La. Civ. Code Ann. 462
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In the Sales Tax World, Nothing is Certain.

Service providers cant make any assumptions about the taxability of the services they provide. The historical trend in the services realm has been a slow crawl towards universal taxability. Whether a service is taxable or not is hardly an open and shut case. The universe of taxable services continues to expand while the universe of exempt services continues to contract. Service providers who operate in multiple jurisdictions find the taxability question is made more complex by the variations between different states and localities. Sales tax law in the services arena includes multiple terms and variable definitions of similar terms across jurisdictions. On top of the bureaucratic complexity, the consuming public does not accept the taxability of services intuitively. Service providers are forever challenged by customers who view sales taxes on services as unexpected and unwelcome. As a service provider, your core expertise is rarely in sales tax management. In fact, a whole class of service providers has emerged to provide accounting and administrative services for businesses of all sizes to meet the needs of professionals who desire to focus their energy on what they know best, instead of the mundane, manual processes of the business. Let sales tax experts manage your services taxability questions and concerns. Automated solutions of today are easily accessible via the Cloud. Look for a solution that provides a scalable model to meet your needs now and easily grows as your business grows. Seek a tax expert to help you define and identify your sales tax obligations; set up a cloud-based automated sales tax solution and you will never have to worry about another sales tax rate or calculation again.

Author:
SHANE RATIGAN began his career as a self-employed business owner. After 10 years in the motorcycle business, he returned to college to gain a Bachelors in Accounting and a Bachelors in Business Administration. He went on to earn his Juris Doctorate at Syracuse University College of Law in New York and his LLM Masters of Taxation at the University of Washington in Seattle. Shane has spent several years counseling small business owners on tax and succession planning. He is a licensed attorney in Oregon and Washington. Shane currently works in sales tax law and sales tax compliance with Avalara, a Software-as-a-Service end-to-end sales tax solution for businesses of all sizes. . Learn more about AvaTax today. AvalaraMaking sales tax less taxing.
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