Performing Services? Watch Out for Sales Tax
Posted on 11.06.14
By Ryan Beethoven-Wilson, CPA, Senior Tax Associate
*Note: This article was published on November 6, 2014 and may not reflect the 2018 potential changes to sales and use tax.
Taxpayers performing services often think they do not need to be all that concerned with sales tax. Virginia and a few of our neighboring states generally have taken a hands-off approach when it comes to imposing sales tax on charges for services provided. However, as our economy becomes more and more service based, it’s only logical that states want to get in on the action. While not meant to be a comprehensive list, this quick article will highlight some of the services that Virginia and others have brought under the sales tax umbrella.
Generally, Virginia has been quite favorable to service-performing taxpayers. One of the big things Virginia looks for is whether or not a service was connected to the sale of tangible personal property. For example, let’s take a computer company selling hardware to a customer. They may likely also be selling consulting services such as system design, implementation, and installation along with the hardware itself. In Virginia, the design and implementation services are taxable since they are directly connected with the tangible property. The installation charge is specifically exempted by law, but only if installation is separately stated on the sales contract/invoice. If not broken out (i.e. there is just one lump- sum bill), the entire sale may be taxable. Some of the other services taxable in Virginia include many communications services, fabrication of tangible personal property in connection with a customer order, and meals and lodging. As a reminder sales tax rates in Virginia increased effective July 1, 2013, and slightly higher rates are applicable in the Northern Virginia and Hampton Roads regions.
Our nation’s capital taxes many services and has differing sales tax rates depending on the type of service offered. For example, the normal sales tax rate there is 5.75%, but restaurant meals and alcohol are taxed at 10%, commercial parking lots are taxed at 18.5%, and parking at hotels is taxed at 14.5%. Additionally, bookkeeping, catering, data processing and other computer-related services, information services, dry cleaning, lawn care, limousine, and software as a service are all taxable in DC (at the 5.75% rate). Not surprisingly, lobbying services are exempt.
Maryland charges sales tax on services in connection with the production, fabrication, or printing of tangible personal property upon special order. Security services, credit reporting and collection services, and commercial building maintenance services (cleaning/janitorial) are all subject to Maryland sales tax as well.
Repair services in North Carolina may be subject to sales tax. Beginning in 2014, service contracts (i.e. maintenance, repair, or extended warranty agreements) are subject to sales tax when the contract is sold to a customer. In the absence of a contract (i.e. a one-time repair), it is important to look how the repair services are billed. On a repair invoice, charges for materials and/or supplies are subject to sales tax, while charges for labor are not taxable. North Carolina also taxes delivery fees (but not installation fees) in connection with sales of tangible personal property to consumers.
Ironically, in the public accounting world a recent Administrative Law Judge ruled that Enrolled Agents are subject to sales tax on certain services performed, namely sales and use tax reporting and audit defense in connection with state tax audits. While professional services are generally exempt in West Virginia, ambiguity in the state’s law opened up a loophole by which the courts ruled that only services performed by EA’s in practice before the IRS constituted “professional services.” Therefore, the ALJ ruled, services performed by EA’s in practice before state authorities do not count as exempt, making them subject to sales tax. Oddly enough, by West Virginia law all activities of CPA’s are exempt since CPA’s (not Enrolled Agents) are mentioned specifically. West Virginia taxes most services, other than professional and personal services.
Again, this is not meant to be a full list of services subject to sales tax, but rather a way to bring awareness to what may be an issue of increasing importance. As we go forward, it will be key to monitor developments in this area to see which direction Virginia and others are moving. With different rules for each state, and in some states different rules at the local level, the sales tax arena can be a diverse and complicated place.
As always, please feel free to contact a Keiter representative or email us, firstname.lastname@example.org, with any specific questions or guidance needed.