How Sales Tax Affects Businesses in the Service Industry

At one time, sales tax was only collected on goods. Services were exempt. However, as time passed, lawmakers discovered that a tremendous source of revenue was being lost. So, after careful consideration, they decided that certain services were going to have to collect sales tax.

State Authorities

When it comes to sales tax collection, you’ll want to check with your state tax authority. Some states charge a flat sales tax on all services, while others take a more piecemeal approach. For example, some states allow for a business to defer paying sales tax when material is purchased, while others insist on sales tax being collected at the time of purchase. This means that home repairs on one state might be able to collect the sales tax of paint that is purchased when the job is completed, while other states might want sales tax collected on the paint when the paint is initially purchased. When it comes to making the determination as to how the services are to be taxed, it’s always a good idea to check with the state authorities about any questions you might have.

Budget Considerations

If your business provides services that can be taxed, it’s important to factor sales tax into your budget. A surprising number of small businesses fail to take sales tax into account when they first begin operations. This means they charge sales tax throughout the month, but when the end of the month arrives and they have to pay the sales tax to local authorities, they have already spent it in the course of operations. When creating a budget for your business, always remember to take the sales tax figures out of the equation, since that money is not actually yours to spend. It is best to learn as much as possible by either earning an accounting degree, or at least consulting someone who already has one.


If it sounds like sales tax can be somewhat confusing, you’re right – it is. Sometimes, even the state Department of Revenue doesn’t seem to fully understand how the sales tax is to be collected. For example, Massachusetts enacted a measure in 2013 that made business-to-business services able to be taxed. Under the guidelines, a business providing computer network services had to collect sales tax for services rendered. However, under the same guidelines, data storage did not have to have sales tax collected. Whenever there is any confusion, check with state authorities and get clarification. Of course, when you have a conversation with an individual providing you with information, always try to get that clarification in writing. If that is not possible, make sure that you get the name of the individual giving you that information.


Every state has its own rules for exemptions. Small business owners need to make it their business to know what the exemptions are. Larger companies tend to have professionals handling all the exemption information, but if you’re the person handling the sales tax exemptions in your company, you’ll want to make sure you know how the sales tax system works and what can be safely exempted. In many cases, the exemptions also include the identity of the buyer. For example, federal government employees often do not find themselves paying sales tax for services provided to the federal government. The same holds true for non-profit organizations.


When it comes to sales tax and your service business, make sure that you have documentation on everything that you purchase and every service that you provide. In the event of an audit, that documentation is the only thing standing between you and a huge sales tax bill. While audits can be nerve-wracking, it’s important to remember that having the paperwork to back up any claims that you make will go a long way towards making sure that you protect yourself and your business.

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