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Sales & Use Tax Tips for February 2009
SALES AND USE TAX FOR SERVICE PROVIDERS AND PROFESSIONALS
My Company’s Services aren’t Taxable. Why Worry about Sales or Use Tax?
Professional and personal services are not subject to sales tax in many states. However, even if a company’s services are not taxable, the company may still be required to register, collect and remit sales tax or self assess and remit use tax.
A business located in a state that does not impose tax on such services may still have a filing obligation. Do you sell any goods with your services? Do you provide your services in other states? You may need to register, collect and remit.
Does your company make purchases over the internet or in areas outside of your local or your state’s taxing jurisdiction? Do you move assets from one location to another? If so, the vendor may not be required to collect sales tax at all or at least not at your combined rate.
Use tax is usually owed when an end user hasn’t paid sales tax on a purchase or hasn’t paid at least the equivalent rate that would be charged if purchased from a local vendor. Colorado offers a good example of rate differentials being required to be paid as use tax even between different Colorado cities when home-rule cities are involved. If a business in a home-rule city such as Denver purchases office supplies from a neighboring city whose combined sales tax rate is less than Denver’s, the difference or rate differential will be owed to Denver as use tax.
In another scenario, hair styling is generally not a taxable service in the majority of states; however, a hair salon may sell a variety of hair products to their customers. Additionally, items purchased as tax exempt for resale may be removed from inventory and used directly by the company or for personal use. In these situations, the hair salon would be required to register, collect and remit sales tax on the product sales and to self assess use tax on the supplies taken out of inventory for company or personal use.
Additionally, when tangible personal property is transferred with services, taxability becomes more complicated. Many states would look to the nature of the transaction to determine whether the true object of the transaction was the tangible personal property itself or the service. For instance, in Pennsylvania a transaction is presumed to be taxable when there is a transfer of tangible personal property unless the purchaser can prove the predominant purpose of the transaction is a transfer of nontaxable services.
Some types of services may only be deemed nontaxable when provided by certain persons. For example in New York, the drafting of drawings (i.e. blue prints) should be deemed nontaxable when the service is provided by a licensed architect or such drawings are completed under the supervision and signed off by a licensed architect and such certification is required by law. Otherwise the drafting of such drawings should be deemed taxable. Additionally, if an architect or engineer provides designing services in addition to architectural services the architects design services should be deemed taxable.
It’s also important to note that how you invoice can make a difference. Combining taxable and nontaxable items or services together often renders the entire transaction as taxable! You are then at a disadvantage if your competitors separately state taxable and nontaxable components of a transaction.
The bottom line is that service providers may need to take a closer look at taxability issues for both sales and use tax.
CAUTION: Though filing a return will limit the look-back period, registering for Sales & Use Tax purposes does not resolve prior liabilities and should only be done after a careful evaluation of your potential liability and the exposure resolution alternatives available to you. This evaluation should be done with the help of a qualified Sales Tax professional. Registering prematurely and indiscriminately can severely limit your options and any positive financial benefits. In fact, it can easily result in negative consequences.
We suggest you evaluate and resolve past liabilities, register and file a return where needed, limit the look-back period, and minimize your future liability.
If you have questions about use tax or your company is providing a variety of services or is providing services in many different states, we can help.
Our professionals can help minimize potential penalties and interest and make sure your company is in compliance with sales and use tax laws. We can also assist in proactively obtaining voluntary disclosure agreements in the event your company has undiscovered sales and use tax liabilities. For more information please see the Exposure Resolution section of our website.
Click here for more Sales Tax Tips or visit our website www.oatax.com. For additional insight on common sales tax concerns, please see the Did You Know? section of our website.
Should you have questions or require assistance please Contact us today or call 1-888-466-2829 to speak with an Olivier &
Associates Sales and Use Tax professional for a no-obligation consultation about your Sales & Use Tax issues.
* This tip is intended to provide general information only and is not to be considered as a substitute for professional advice.
