How Service Taxability is Changing in 2017
When sales taxes first went into effect in the 1930s, they generally only applied to the purchase of physical property. This reflected the nature of the economy, but many things have changed since then, including the number and types of services available. This has led states to reassess whether to tax services and which ones to tax. Many states now do consider at least some services to be taxable, and that list looks to continue growing over time.
Taxes on Services
As a rule, services used to not be taxed if they were pure services. That means that the service was the primary rather than secondary object in the sale. For instance, if you purchased a new appliance for your home such as a furnace or boiler that needed to be installed by a professional, the installation service would be taxable, as the primary object of the sale was the equipment installed. On the other hand, a part purchased to repair that boiler or furnace under a service contract later would not be taxable.
The expanding chunk of the economy that the service industry represents, however, has caused many states to change how they view taxable services. There are still only a few states that tax most services. These are Hawaii, New Mexico, West Virginia, and South Dakota. In Virginia, Massachusetts, Nevada, Illinois, and Colorado, less than 20 specifically enumerated services are taxable, with the specifics varying somewhat from one to another. Some states tax certain categories of services, while others offer a list of the taxable services, leaving all others exempt.
What’s New With Taxes on Services?
The state making the most significant changes in 2017 regarding taxable services is North Carolina. This state expanded the list of taxable services somewhat in 2016, with even more changes going into effect on January 1, 2017. The new expansion applies to services involving repair, maintenance, and installation of real and digital property, which includes cleaning, washing, or polishing.
Covered under the new statute are services that involve troubleshooting, inspection or monitoring of property or motor vehicles. Additionally, companies or individuals whose only business activity is providing repair, maintenance, and installation services must register as a retailer to collect and remit sales tax related to those services.
There are some exemptions to the new laws in North Carolina, including:
- Fees for legally-required inspections
- Services to resolve an issue arising from work done under a real property contract within 6 months of the completion of the contract
- Services to resolve an issue on new construction completed under a real property contract within 12 months of initial occupation of the structure
- Cleaning of real property
- Services on roads, driveways, parking lots, and sidewalks
- Removal of waste and snow
- Home inspections during a sale
- Pest control
- Moving services
- Self-service car washes
- Certain services related to agriculture
These changes in North Carolina are likely indicative of the trend towards taxing a greater number and variety of services nationally. However, there is some resistance to this trend, as can be seen from the recent vote in Missouri to prohibit the expansion of sales tax to any services that were not already taxed as of January 1, 2015.
Another recent development is the proliferation of streaming services for TV shows and movies. Several regions already taxed these kinds of services, including Chicago and Pennsylvania, and Pasadena, CA introduced a new tax on streaming on January 1, 2017. Several other parts of California are contemplating this type of tax as well, and it’s likely to expand quickly over the next few years as more and more people use streaming as their primary source of video entertainment.
Tax Rate Changes
Although they’re not imposing any new taxes on services, both California and New Jersey have overall state sales tax rate changes going into effect at the start of 2017, and these new rates will be applicable to any taxable services in those states as well. The new rates are both lower than the previous rate, with California’s state sales tax rate decreasing from 7.5% to 7.25%, and New Jersey’s going from 7% to 6.85%.
In the case of California, the change is a reversion back to an old rate after a temporarily higher rate expired at the end of 2016. New Jersey’s new sales tax rate is the result of an effort to offset a recent increase in the state gas tax, and it is scheduled to drop even more in 2018.
While the specific changes taking effect in 2017 are limited, they are indicative of a growing trend towards taxing a greater array of services in a shifting economy. The combination of new types of services arising from advances in technology and the simple fact that people spend more of their money on services now than they used to is what’s behind this trend, and although the spread of these changes is slowed by resistance, as seen in Missouri this year, it’s unlikely to be enough to stop the momentum altogether in the coming years.