No longer limited to the sale of physical goods, many states now impose a sales tax on many, if not all services

At the time of writing, only half the states in the union do not charge sales tax for services, at least enough to be considered significant. Currently, only Hawaii, New Mexico, South Dakota, and West Virginia charge their sales taxes on all services. There are of course a few specified exceptions. The other states tax specific services, allowing all services not specified to remain exempt.

Blurring the border between service and taxable property sale

Now, even services that should normally be exempt from sales tax, may end up being taxable. If a service is provided in conjunction with a taxable sale of personal property, taxes associated with the property may be imposed on the price of the service as well. This means that delivery charges for a sofa may be subject to the same tax as the sofa itself.

One way to avoid unnecessary service taxes

To avoid this problem, clearly state nontaxable service charges separately from the taxable sales price. More importantly, the services must be provided after the sale is completed (for example, installation of carpeting in your office). The reason for this is, the charges for services provided before the customer ‘taking title' to the property are subject to tax, despite being billed separately. If this were not the case the sofa salesman could argue that all labor costs associated with manufacturing the sofa don't apply.

Also, in the case of a transaction involving a nontaxable service and taxable property where the property element of the sale is considered ‘incidental', around 10 percent or less of the total sale, the entire sale can be considered a nontaxable service.

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