It’s that time of year again when everyone suddenly thinks about preparing their income taxes. But does tax preparation incur sales taxes – and if it does, where and how?Tax preparers are generally accredited individuals – certified public accountant (CPA) and enrolled agent (EA) are two common preparer designations – who have completed previous and ongoing education to understand compliance for varied tax purposes.
For some 90 years, states have levied sales tax on goods (West Virginia was the first to do so, in 1921). State and local sales tax is sometimes levied on services but much more often applied to “tangible personal property.” As our economy becomes increasingly service-based, this is seemingly changing as states and other tax jurisdictions realize they’re missing a potentially big tax revenue stream.
Sourcing is huge
Several states levy their sales tax or its equivalent on services, among them Hawaii (which has a general excise tax, or GET), and New Mexico. Accounting services are often, but not always, exempt. In recent years, Connecticut, Maryland, and California toyed with levying state sales tax on accounting services but found it a tough fight in the face of intense lobbying from accountants’ groups. (Lobbying is a major reason that professional services generally don’t incur sales tax nationwide).
South Dakota taxes accounting services and might be a model for how states could tax this service in the future.
Accounting services – which in general are increasingly delivered online with diminishing concern for state borders – are subject to South Dakota sales tax, plus applicable municipal sales tax, with sourcing rules. If the client receives the service at the accountant’s office, the sales tax rate at the accountant’s office location applies; if the client does not receive the service at the accountant’s office, the sales tax rate is based on the customer’s address.
“Services are subject to sales tax where the service is received,” South Dakota rules read, “which means where the client first uses the service. Generally, the service is first used where the client receives a report or results of the service.”
South Dakota use tax is based on where the service is used. Use tax is due if the service is used in South Dakota and no sales tax was collected, or if the sales tax collected is at a lower rate than the use tax due. Use tax applies based on where the client is using the service. In the case of a business, the location of the business determines the tax. In the case of an individual, their primary address determines the tax.
Observers say that states typically consider taxing accounting and other services when their coffers run dry. Temporary and unexpected sales tax revenue surpluses right now may forestall this issue for a while, but look for it to pop up again somewhere down the road – probably right in time for another tax-filing season.
We can help you comply and stay on top of this ever-changing tax environment. Contact us to learn about the latest developments in sales tax and what they mean to you and your company.