Does An Online Service Business Have To Pay Income Tax In Every State

A state-by-state analysis of charging sales tax on services

When state legislatures in the United States implemented the first sales revenue enhancement laws to boost revenues in the 1930s, the American economic system depended on the manufacture and sale of physical appurtenances. Typically, early sales taxation laws immune but the taxation of "tangible personal property" (TPP), rather than taxing services.

As the The states has shifted from a manufacturing-based economy to a service-based economy, many states started to impose sales and use revenue enhancement on services likewise. Many businesses that provide services are still unaware of these statutory changes—some mistakenly believe they don't accept to pay any sales tax at all, even if they're selling services all over the The states.

Every state taxes services in its own way

This guide is designed to provide an overview of the complexity of sales revenue enhancement on services past state.

V U.S. states (New Hampshire, Oregon, Montana, Alaska, and Delaware) do non impose whatever general, statewide sales tax, whether on goods or services. Of the 45 states remaining, 4 (Hawaii, South Dakota, New Mexico, and Westward Virginia) tax services past default, with exceptions only for services specifically exempted in the constabulary.

This leaves 41 states — and the District of Columbia — where services are non taxed by default, but services enumerated by the country may be taxed. Every one of these states taxes a unlike set of services, making it hard for service businesses to understand which states' laws crave them to file a return, aswell every bit which specific elements of their services are taxable.

Categories of taxable services

No two states tax exactly the same specific services, but the general types of services being taxed tin can be divided roughly into half dozen categories.

Services to TPP: Many states have started to tax services to tangible personal property at the same charge per unit every bit sales of TPP. These services typically ameliorate or repair property. Services to TPP could include anything from carpentry services to car repair.

Services to real property: Improvements to buildings and state fall into this category. 1 of the about commonly taxed services in this area is landscaping and lawn service. Janitorial services also fall into this category.

Business organization services: Services performed for companies and businesses fall into this category. Examples include telephone answering services, credit reporting agencies and credit bureaus, and extermination services.

Personal services: Personal services include a range of businesses that provide personal grooming or other types of "self-improvement." For example, tanning salons, massages not performed by a licensed massage therapist, and beast training services can be considered "personal services."

Professional person services: The least taxed service area, in large part because professional groups have powerful lobbying presences. Professional services include attorneys, physicians, accountants, and other licensed professionals.

Amusement/Recreation: Admission to recreational events and amusement parks, too every bit other types of entertainment. Some states that tax very few other services, similar Utah, still taxation admission charges to virtually sporting and entertainment events.

How to utilize this US sales taxation map

Remember that within each category of services, states can notwithstanding have drastically different regulations. For example, both Florida and Iowa are marked equally taxing "business services," even though Iowa taxes a wide range of these services and Florida but taxes security and detective services.

For more details virtually the specific tax liability of your business organization in individual states, consult state Departments of Revenue for additional information.

Services taxability map of United States

Summary of service taxation of US states

Rules to follow when evaluating sales tax on services

1. Avoid making assumptions

Many companies assume services delivered in conjunction with goods sold (e.g., swimming puddle and pool cleaning, computers and maintenance, structure materials and installation) aren't taxable, but that'south often not the case. Delaware, Hawaii, New Mexico, and Southward Dakota tax most services. Still others, similar Texas and Minnesota, are actively expanding service taxability.

Businesses that sell services across multiple states need to know where those services are subject area to sales taxation. The fact that sales tax laws frequently modify makes it challenging to remain in compliance.

2. Remember that sales tax rates can (and exercise) change

States regularly change product and service taxability rules, and the onus of staying on top of changes is on businesses. For instance, Washington state lawmakers decided to tax martial arts and mixed martial arts classes in the fall of 2015. Two years afterwards, many of those services were in one case more exempt. Failure to correctly apply sales revenue enhancement rates and rules to products and services tin can atomic number 82 to plush errors.

Knowing which rate to charge and which sales tax rules apply is specially challenging for companies that sell goods or services in multiple states. No two states have the aforementioned sales tax laws.

3. Understand your nexus exposure

Well-nigh states at present crave sure out-of-state sellers to annals with the tax authority and so collect and remit sales revenue enhancement. What's challenging is figuring out which states require which businesses to do and then. That depends on nexus — the connection between a business organization and a country that triggers a sales tax collection obligation.

Having a concrete presence in a land always triggers nexus, but thanks to the United States Supreme Court conclusion in South Dakota v. Wayfair, Inc. (June 21, 2018), nexus can as well exist created by economic activity lone (economic nexus). Every bit of June 2020, 43 states and the Commune of Columbia require out-of-state businesses with a certain volume of sales or number of transactions in the state to collect and remit sales revenue enhancement.

Determining nexus is the first step toward sales taxation compliance.

4. Services sold with taxable goods tin can complicate sales tax

Many businesses that provide client support, installation, or warranty services in conjunction with the auction of a physical good demand to hire an regular army of accountants to make up one's mind what's taxable and what's exempt. If you lot sell service contracts separately or in tandem with sales of tangible goods, you may exist liable to collect sales tax.

While Hawaii, New Mexico, and South Dakota generally tax all sales of services, many other states tax some services but not others. The challenge for businesses is determining which services are taxable in states where they have nexus (an obligation to collect sales revenue enhancement). In some states, businesses must charge sales tax on services provided in conjunction with sales of concrete goods.

5. The true object test can help determine service taxability

When a sale includes both a product and a service, some states utilize a true object test to determine the taxability of the transaction. If the main purpose of the transaction (the true object) is the sale of taxable belongings or equipment, the entire transaction is subject to sales tax. If the main purpose of the transaction is instead the sale of an exempt service, the entire transaction is generally exempt.

Combined sales of products and services are more common in some industries than others, notably the construction, manufacturing, and medical industries. For instance, an insulin monitor often accompanies the auction of diabetes treatment. In this instance, the product is secondary to the service, and taxability is based on the existent object of the transaction — the service provided.