Quick assessment tool that will help you determine which of your products and services are taxable…
In most states, services providers have a very different perspective on sales tax than retailers. As long as they are providing a non-taxable service, they don’t need to collect and remit sales tax on their sales of services. But if you’re a service provider who is selling goods along with non-taxable services, you may be making one simple but big mistake that can create a sales tax burden for your business. Thankfully, there is an easy way to fix this mistake.
What I’m referring to here is the language that you use on the invoices that you provide to your customers. If your invoices don’t clearly describe what you are selling and segregate your services from any taxable goods, chances are good that the state will consider you a seller of goods rather than services. And as such, you could be legally required to collect sales tax on the total invoice amount, including the non-taxable services you’re providing.
Regardless of the type of service you provide, you need to pay attention to the language you use on your invoice and the way you list the items sold. Here are a few important tips on invoicing that will help ensure you’re not needlessly creating a sales tax burden for yourself.
If you charge a single price for a bundle of taxable and nontaxable goods and services, the state will generally impose tax on the entire sales price. This is a major problem if you are providing non-taxable services along with taxable goods (e.g. selling a piece of equipment along with delivery or installation).
If you charge one lump sum, the state will generally consider the service to be part of the sale of goods and tax the entire price. The state will look at the intention of the parties and the “true object” of the transaction to determine whether it is taxable or not. In this case, the true object of the transaction is frequently determined to be the equipment, not the installation. As a result, the non-taxable service becomes subject to tax.
Fortunately, there is an easy way to avoid this situation. Here’s the simple solution: Separately state the taxable and non-taxable line items on the invoice or contract provided to the purchaser. Yes, simply breaking out the individual services and goods onto different line items on the invoice or contract can help ensure that non-taxable services don’t become subject to sales tax.
Rules differ by state, but generally, if an invoices has both a taxable and non-taxable component, the non-taxable component must be separately stated or the entire receipt becomes subject to tax. In some states, if the predominant cost of the items lumped into one amount are taxable, the entire amount is subject to tax.
On the other hand, some states allow the percentage of taxable items in the lump-sum amount to only be subject to tax. Or there may be a “de minimus” rule. For example, Texas will allow 5% of the bundled charge to represent taxable materials in an otherwise non-taxable service transaction. But if the materials exceed 5% of the total bundled price, then the entire charge becomes taxable.
If is also important to understand a state’s definitions of terms like tangible personal property and to understand what tax is imposed on. For example, in New York, a company was subject to sales tax on pet sitting services because pets are tangible personal property, and the services provided by the company were the taxable maintenance and servicing of tangible personal property.
In this case, separately stating the services didn’t impact the taxability since maintenance of tangible property is a taxable service. But not understanding that pets are defined as tangible personal property created the confusion.