The service sector of our society is growing at a rapid pace. The number of services available is increasing, along with the percentage of corporate America and individuals participating in the service sector. This sector includes banking, insurance and finance, health care, law, accounting, transportation, hospitality, personal care, consulting, and information management.

Most states impose their sales taxes primarily on retail transactions that involve the transfer of tangible personal property. Under this structure, tax applies only to those services specifically subjected to taxation. Charges for cutting hair, cleaning, laundering, tanning, and shoe shining are often exempt from tax because the service provider's business falls into the category of a nontaxable service enterprise. Some states with this type of tax scheme have specifically tax a multitude of services. A few states impose tax more generally on all sales of property and services or on the privilege of doing business. Under this scheme, charges for the provision of services are subject to taxation with few exceptions. It is also important to note that an otherwise nontaxable service may be subject to tax if it is construed to be part of a taxable sale of tangible personal property.

Generally, a service provider must pay tax when purchasing property that he or she will use or consume in the business or providing a service. If taxable items will be sold to customers in the regular course of business, the service provider's initial purchases of those particular items should qualify as exempt purchases for resale. In addition, a number of states have provisions specifically allowing a service provider to purchase services for resale.

It is important to know how a particular state treats services so that you will not be caught by audit surprise!

Feel free to call or e-mail us to discuss any tax issues you may have.

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