While many retailers are focused on the flood of consumers turning to online vendors to purchase goods, they may not be aware of the fact that some states are trying to pass budgets and legislation to remove exemptions for service providers, in some or all areas.

This is because sales taxes revenues are falling in some states.

One example? Georgia.

In October, Georgia State University published a report entitled “Georgia’s Incredible Shrinking Sales Tax Base.” WABE News summarizes the report, which claims that Georgian consumers are spending much less money on goods, and therefore, paying less sales tax (article no longer available). While income for residents is up, sales tax revenue for the state of Georgia has shrunk by 31% (when adjusted for inflation). Author Robert Buschman claims most of that loss comes from the consumer move towards spending on untaxed services over goods, like restaurant meals and housekeeping services.

Is this an isolated problem for Georgia, or a new trend across the U.S.? PEW Charitable Trust’s report, Fiscal 50, which examines tax revenues across the country, claims that tax revenue has increased since balancing out over the last 2 years from the 2008 recession. However, not every state has recovered from the recession yet and the report found that tax revenue is now growing more slowly – not just because of consumers’ changing habits but due to a variety of factors.

Additionally, while PEW’s outlook for a state like New York was positive, a recent report by WBFO News claims that N.Y. sales tax revenues are sliding. There are similar reports for Utah. With state revenues waning, affected by a host of issues like a drop in fuel consumption, will states to move towards levying a sales tax on service professions?

It does seem possible in the near future, even if it is unlikely across most states today. Here is a sample of states that are now considering new legislation on taxing services:

  • In November, The Sacramento Bee reported that California’s Senator Bob Herzberg proposed extending sales to services for that state, which currently only taxes tangible products.
  • Pennsylvania is also debating adding a personal service tax, or more accurately, removing the service exemption for services like funeral services and personal fitness, even though this state’s tax revenue has recovered from the recession by 0.9%, according to Fiscal 50.
  • Idaho is seeking to cut exemptions for certain services, including information services, repairs, and several professional services. This state already taxes lodging, recreation, admissions, restaurant meals and printing.
  • Washington State has a new bill that will mean martial arts studios will have to pay sales taxes.

Some bills have been shot down, but the proposals keep coming. Whether or not states are feeling the pinch of decreasing tangible goods tax revenue, it seems clear that this could be a future trend.

What does mean for small business service providers?

The future is uncertain but growing online service provider industries, like information technology, coaching and virtual assistants, need to remain vigilant of both nexus laws and any new service provider tax laws.

For example, Pennsylvania’s new proposal to tax accounting services means that a virtual assistant may or may not be taxed, depending on the services they provide. If they organize bills and receipts or ledgers for a client, a VA could be considered as providing accounting services that may be taxable. It certainly seems like Pennsylvania is currently taking an aggressive position on state taxes.

How can an online retailer know when they need to pay a new service tax?

The once reliable True Object test may not be enough. This test determines whether a service (or related equipment) is incidental or the main item. For example, if you were purchasing large appliance, the installation is often taxed, because that is incidental to the fact that you bought a tangible object. But many states apply this logic in different ways, so retailers cannot “assume” that their idea of a True Object test would pass the state’s requirements.

It makes sense, then, that difficulties would arise when vendors that provide services along with items, such as documentation, software or media, particularly as part of a package. Could these situations pass a True Object test in state badly in need of income? States may be more willing to take a hard stance against questionable service items, or test the waters with these new proposals, like Pennsylvania and California.

According to Delaware Online, if Pennsylvania passes a personal service tax, it would only be the second state to do so across the board, with South Dakota. While this may be troubling, Diane Yetter, president and found of a Chicago based sales tax consulting firm, seems certain that like other states, this sort of tax would be repealed if passed. “I don’t know that it would last very long.” But what if both states successfully see a real boost in revenue? Taxed services could become a new trend.

While the prospect is iffy, the future of exempt service taxes is a hot button issue that online retailers who provide services, primarily and incidentally, need to track closely.

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