Companies that perform services often see themselves as tax exempt, and in many cases that is true, but there are certain states and situations in which that is not the case. Gain a better understanding of your sales and use tax obligations with these frequently asked questions we have received from businesses that provide services.
1. My business sells software and provides other computer services. Is there anything they should be concerned about with sales & use tax?
Companies that sell and install software and provide other computer related services have a variety of issues they should be concerned with. First, many of these companies have nexus in many states and do not realize the significance of this connection with the state.
Further, almost all states tax computer software licenses when the software is delivered in a tangible fashion. In addition, more states are taxing software when it is downloaded electronically and even Software-as-a-Service.
In addition to states taxing downloaded software, a few states now tax custom software and many of the consulting services that are used to implement the software when sold.
2. My business only provides data processing services. What multistate sales tax issues might we have?
For companies that provide data processing, there are two separate issues to be concerned with. First, the company must still have nexus with the state where the customer is located before they would have an obligation to collect any taxes that may be due. Second, an analysis should be completed to determine if the service is taxable. There is not an established definition of what constitutes "data processing." States may consider these services to also be "information services" or "computer services".
There are less than 15 states that tax data processing, information processing and computer services. There may also be special tax rates for these services or special limited exemptions for these services.
3. My company only provides services, so what type of sales tax concerns should I have?
In most states, the performance of personal and professional services is not a taxable event. New Mexico, Hawaii, and South Dakota tax a variety of services. If the service you perform includes data processing, information analysis, communications, or the interstate movement of data you may be performing a service that is taxable in a number of states.
If your service involves the construction of real property or the installation of property, there are a variety of issues you must concern yourself with. Contractors owe tax on all the items of material they purchase. They are generally not permitted to purchase materials for resale. As with all rules, there some very limited exceptions to this rule.
Providers of non-taxable services have the obligation to pay tax on all the property they purchase to perform the service. For example, a contractor must pay the tax on all the construction materials they purchase. As a service provider, it is very important that the invoice submitted to your customer indicate what service is provided and that there is no segregation of property and labor on the invoice. Anytime items of property and service are separated on the invoice it could appear that the property was resold and that tax should have been collected.
4. What are some unusual services that are taxed by states?
It would be difficult to provide an exhaustive list of the services that are taxable. Some of the uncommon services taxed by several states include:
Detective and investigatory services
Credit reporting and bad check lists
Pre-employment background checks and resume verification
Car storage charges
Armored car services
Criminal background checks
Even though most states don't tax services, it is still a prudent effort to verify that your service is not taxable before you start offering it.