Is Abtax Professional Required To Collect Sales Tax On Tax Preparation Services In Illinois

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

When country legislatures in the United States implemented the first sales tax laws to heave revenues in the 1930s, the American economy depended on the manufacture and sale of concrete appurtenances. Typically, early sales tax laws immune only the taxation of "tangible personal property" (TPP), rather than taxing services.

Every bit the United States has shifted from a manufacturing-based economy to a service-based economy, many states started to impose sales and use tax on services besides. Many businesses that provide services are still unaware of these statutory changes—some mistakenly believe they don't have to pay whatsoever sales tax at all, fifty-fifty if they're selling services all over the United states.

Every state taxes services in its own way

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

Five U.Southward. states (New Hampshire, Oregon, Montana, Alaska, and Delaware) do not impose whatever general, statewide sales tax, whether on appurtenances or services. Of the 45 states remaining, four (Hawaii, South Dakota, New United mexican states, and Due west Virginia) tax services by default, with exceptions only for services specifically exempted in the law.

This leaves 41 states — and the Commune of Columbia — where services are non taxed by default, only services enumerated by the land may exist taxed. Every one of these states taxes a different fix of services, making it difficult for service businesses to sympathize which states' laws crave them to file a return, aswell as which specific elements of their services are taxable.

Categories of taxable services

No two states taxation exactly the same specific services, just the general types of services being taxed can be divided roughly into six categories.

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

Services to real property: Improvements to buildings and land fall into this category. I of the most commonly taxed services in this area is landscaping and backyard service. Janitorial services likewise fall into this category.

Business 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-comeback." For example, tanning salons, massages not performed by a licensed massage therapist, and fauna preparation services tin can exist considered "personal services."

Professional services: The least taxed service area, in large part considering 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, as well every bit other types of entertainment. Some states that tax very few other services, like Utah, still tax admission charges to about sporting and entertainment events.

How to use this U.s. sales taxation map

Remember that within each category of services, states can still take drastically different regulations. For instance, both Florida and Iowa are marked as taxing "business services," even though Iowa taxes a wide range of these services and Florida merely taxes security and detective services.

For more details nearly 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 revenue enhancement on services

i. Avoid making assumptions

Many companies assume services delivered in conjunction with goods sold (e.g., pond pool and pool cleaning, computers and maintenance, construction materials and installation) aren't taxable, but that's frequently not the instance. Delaware, Hawaii, New Mexico, and Due south Dakota taxation nigh 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 bailiwick to sales tax. The fact that sales tax laws often change makes information technology challenging to remain in compliance.

2. Retrieve that sales revenue enhancement rates tin can (and do) change

States regularly change production and service taxability rules, and the onus of staying on top of changes is on businesses. For example, Washington land lawmakers decided to tax martial arts and mixed martial arts classes in the fall of 2015. Two years later, many of those services were once more exempt. Failure to correctly apply sales tax rates and rules to products and services can lead to costly errors.

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

3. Understand your nexus exposure

Most states now require certain out-of-state sellers to register with the taxation authority then collect and remit sales tax. What's challenging is figuring out which states crave which businesses to do so. That depends on nexus — the connection between a business and a state that triggers a sales taxation drove obligation.

Having a physical presence in a country always triggers nexus, but thank you to the The states Supreme Courtroom decision in South Dakota v. Wayfair, Inc. (June 21, 2018), nexus tin can as well exist created by economic action alone (economical nexus). Equally of June 2020, 43 states and the District of Columbia crave out-of-land businesses with a sure book of sales or number of transactions in the land to collect and remit sales tax.

Determining nexus is the starting time step toward sales tax compliance.

4. Services sold with taxable goods can complicate sales tax

Many businesses that provide client support, installation, or warranty services in conjunction with the sale of a concrete good need to hire an army of accountants to determine what'south taxable and what'south exempt. If you sell service contracts separately or in tandem with sales of tangible goods, y'all may be liable to collect sales taxation.

While Hawaii, New United mexican states, and South Dakota generally taxation 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 accept nexus (an obligation to collect sales revenue enhancement). In some states, businesses must charge sales tax on services provided in conjunction with sales of physical goods.

5. The true object examination can assistance determine service taxability

When a auction includes both a product and a service, some states utilize a truthful object test to determine the taxability of the transaction. If the main purpose of the transaction (the truthful object) is the sale of taxable property or equipment, the entire transaction is field of study to sales tax. If the main purpose of the transaction is instead the auction 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 structure, manufacturing, and medical industries. For example, an insulin monitor oft accompanies the sale of diabetes treatment. In this case, the product is secondary to the service, and taxability is based on the real object of the transaction — the service provided.