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Service Tax Strategies

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Written by Aysling

Published: 05/05/2022

You want to make sure that your company is in compliance with state tax rules and regulations, but with all things digital, that’s not so easy.

Most state tax laws were written for the sale of tangible goods. Then, as we moved from a manufacturing to a service-based economy, states began imposing service taxes.

But when these laws were first drawn up, no one envisioned an economy where services are valued as much as products, and they certainly did not foresee the growth of services online. And so what we have now are tax laws originally created for tangible goods being applied to services. And, as you might guess, how these laws are applied varies among states. Every state has its own way to tax services.

Some basic rules of thumb to follow when you are evaluating your situation for service taxes

  • Don’t make assumptions.
  • Don’t assume that services combined with goods are not taxable. For example, computers and maintenance of the electronics. In many cases, the service is taxable.
  • Companies that provide services across many different states should know where those services are subject to sales tax. Sales tax laws often change, and this makes it more difficult to stay in compliance.
  • Sales tax rates can change.
  • States will often change product and service rules related to taxation. And it is the obligation of companies to stay abreast of these changes. Not applying the proper sales tax rates and rules to products and services can cost businesses a lot of money.
  • It is especially difficult for companies that sell goods and services in many different states because no two states have the same sales tax laws.
Know your nexus status

Most states now require certain out-of-state sellers to collect sales tax. The problem is determining which states require which businesses to do so. That depends on nexus — the connection between a business and a state that triggers a sales tax collection obligation.

Services and taxable goods

  • Services that are sold with taxable goods can make the sales tax situation more complicated.
  • The main purpose of the transaction often determines taxability.
  • Depending on whether the main purpose of a transaction is to provide a product or service often determines whether it is taxable or not.
  • For more details about the specific tax liability of your business in individual states, consult state Departments of Revenue for additional information.

Digital goods

About two-thirds of all the states have some definition of what comprises a digital good for sales tax purposes. They classify digital goods either by using an explicit definition, or by including them in the category of tangible property, or by excluding them from telecommunication services.

Some states are more precise than others in their definitions.

After defining what a digital good is, the next step is to determine whether it should be taxed or not. But it should be noted that how a state does or does not tax a digital good may not relate to the definition of what a digital good is.

Although some states go into much greater detail in their definitions, there are still gray areas. For example, the tax status of digital photographs is not well defined in some states. There are other considerations, such as whether the digital good is transferred permanently, whether it is under a subscription contract, or whether it is delivered with the help of a physical storage device. All of these factors can affect the taxability of different digital products in different states.

There are three general categories to describe how states treat the taxation of digital goods:

  1. Some states have specific laws and regulations that spell out the taxes on digital goods.
  2. Some states incorporate digital goods under existing sales tax laws that apply to other products.
  3. Some states don’t tax digital goods at all.

Each vendor needs to consult with a tax professional to determine the specific tax situation for their products in the states where they sell them.

MagHub and Avalara

If your company is looking for help with taxes, MagHub integrates with Avalara, a leader in tax automation software for a variety of different industries and tax types.

We would love to show you how our cloud-based software solution can handle all aspects of your publishing enterprise, everything from subscriptions, flatplanning, billing, freelancers, projects, and marketing – all from within one system. Contact us to learn more or to set up a real-time demonstration.

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