Business owners are often confused about the difference between sales tax on services vs. products. You may have heard that there is a different tax rate for each, but this isn’t always true. It depends on what state you live in and whether or not your product has been classified as an “intangible personal property.”
This article will explain how to determine which category your product falls into so you can know how much sales tax to charge people when they buy from you, and if you’re in need of further assistance you may want to contact one of the many sales tax service providers, like TaxConnecx, that specialize in helping business navigate the tax world.
Sales Tax on Services vs. Products
The first thing you need to know is that in the United States, there are two types of taxes: federal and state. Federal taxes are collected by the IRS (Internal Revenue Service) and go towards Social Security and national defense. State taxes are collected by your state government and usually go towards education and infrastructure.
Each state has different tax laws, so it’s essential to understand how your form collects taxes before you start charging people for your products or services. In general, states collect sales tax on goods (tangible personal property) and services. However, some states exempt certain items from sales tax, including food, prescription drugs, and clothing.
To determine if your product is subject to sales tax, you need to know if it’s considered a good or service. If it’s good, you need to check if your state exempts it from sales tax. If it’s a service, you need to charge sales tax unless your state has specifically exempted it.
A product is anything that can be moveable and tangible. This includes physical things like books, furniture, and clothing. It also includes digital products like e-books and software. If you sell products, you will need to charge sales tax on them unless your state has exempted the development from sales tax. You can find out if your state exempts certain products by searching for “sales tax exemptions” on your state’s website.
Service is anything that is intangible and cannot be moved. This includes things like haircuts, massages, and car repairs. It also includes digital services like web design and SEO. If you sell services, you will need to charge sales tax on them unless your state has exempted the service from sales tax. You can find out if your state exempts certain services by searching for “sales tax exemptions” on your state’s website.
Intangible Personal Property
Intangible personal property is a product that can be moveable but is not physical. This includes things like stocks, bonds, and copyrights. If you sell intangible personal property, you will need to charge sales tax unless your state has exempted it from sales tax. You can find out if your state exempts certain types of intangible personal property by searching for “sales tax exemptions” on your state’s website.
Seller Privilege Tax States Vs. Consumer Tax States
In some states, sellers must pay what’s called a “seller’s privilege tax.” This is a tax on the gross receipts of the business. In these states, companies don’t charge sales tax to the customer. Instead, they send the total amount of the sale to the state, and the state then taxes the customer indirectly.
In other states, consumers are directly taxed on their purchases through a “consumer use tax.” Businesses charge sales tax to the customer in these states and remit it to the state.
It’s important to know which type of state you live in to understand how to collect taxes from your customers. You can find out if your state is a seller’s privilege tax state or a consumer tax state by searching for “seller’s privilege tax” or “consumer use tax” on your state’s website.
Understanding the difference between sales tax on services vs. products is essential for businesses in the United States. Depending on what type of business you have and what state you’re in, you may be required to charge sales tax on your products or services. You can find out if your state exempts certain products or services from sales tax by searching for “sales tax exemptions” on your state’s website. If you’re unsure whether your state is a seller’s privilege tax state or a consumer use tax state, you can search for “seller’s privilege tax” or “consumer use tax” on your state’s website.