When state legislatures first began enacting sales tax laws in the US, physical goods dominated the American economy. The first sales tax laws in 1930 typically only allowed the taxation of "tangible personal property" (TPP), and did not allow the taxation of services.

Because of the shift from manufacturing to services in the United States, many states now charge a sales and use tax on services as well. There are still many businesses that provide services that are unaware of these changes—some mistakenly believe they do not have to pay any sales taxes at all, even if they are selling services all across the country.

What is sales tax?

A sales tax is paid for the trading of goods and services, usually, the law allows for the collection of a certain amount of money as tax from consumers at the point of sale.

Therefore, a tax on goods or services is paid to the IRS by a consumer; it's automatically called a use tax.

What qualifies as a service?

In a taxation context, service is a transaction between a seller and a buyer but there is no transfer of physical goods. Services are not physical; they are the opposite of goods that can be handled.

Are services subject to sales tax?

The law on the charge of sales tax on services varies from one state to another. Each business or entity providing service has to check the tax laws of the state to get clarity.

Many states do not charge taxes on services. New Hampshire, Delaware, Montana, Alaska, Oregon are all states that do not charge sales tax on services.

The remaining states impose sales tax on different categories of services. It could be a rental service in Kentucky or dry cleaning services in Iowa. To comply with the regulation of the state on sales tax charges, each business must check with the state tax authority to know specific services that require sales tax.

Sales and use taxes don’t apply to lots of transactions. However, amidst the confusing state of sales tax on services, certain general services are taxable.

Which services are subject to sales tax?

Car repair and carpentry repair or improvement are services that will likely always carry sales tax charges.

Certain personal services transactions are also subject to sales tax. Examples are beautician services, hair restoring, barbering, tanning, pedicure, and manicure, massage services, electrolysis, services given by health salons, weight control, gymnasium, and sauna baths.

Some state's decisions vary on the services and products they tax. Most states do not charge sales tax on food but regions like Virginia, Tennessee, West Virginia usually charge sales tax on food. Prescriptions of drugs are exempt from sales taxes in almost all states while some states charge sales tax on the prescription of drugs.

Which services are NOT subject to sales tax?

As for services that are not subject to sales tax, some include telecommunications services, house maintenance, installations, servicing, repairing of pets properties, partaking space, and garaging. Also, sales of the following are not subject to sales tax; rental of property, medical care, food for home consumption, educational services, prescription of medicines, and certain utility services.

Some services are always exempt from tax, which means a purchaser does not need an exemption certificate to make purchases of the services.

In some cases distributors need to show why sales tax wasn't collected from purchasers, otherwise, the distributor might be held responsible for the tax. Except for the use of resale exemption certificates.

Overall, the fact stands that every service provider must get clarification on when sales tax is applicable since the law isn't general.

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