In most states, services are exempted from sales tax unless explicitly made taxable by law. So why are the governors of at least two states, as well as legislators in another, fighting to change that? Sales taxation used to focus exclusively on physical goods. As the United States moved toward a service economy, states started to realize that not taxing services meant giving up billions of dollars in potential revenue.
Today, four states (Hawaii, New Mexico, South Dakota and West Virginia) tax almost all services. Five more states (Alaska, Delaware, Montana, New Hampshire and Oregon) do not have a statewide sales tax (although local governments in some states may charge a sales tax). This leaves 41 states where services are “presumed exempt” from sales tax—but each of these states still explicitly taxes at least some services, and no two states tax the same ones.
Several of those states have recently faced budget shortfalls, and are looking toward a “presumed taxable” law for services instead. California Senate Bill 8 is an example of a single proposal that could change the tax picture for thousands of businesses selling in the state. It would change the state to a “presumed taxable” state, in which most service businesses will have to pay sales tax at the same rate as sellers of physical goods. Expected to raise $10 billion a year in revenue if passed, the bill is currently in committee.
Illinois Governor Bruce Rauner made implementing a sales tax on services part of his 2014 campaign. Illinois, which has a strong service-based economy centered in Chicago, may be losing out on over $2 billion in revenue by leaving a wide range of services untaxed. While the legislature hasn’t passed a bill to tax services in Illinois yet, this change could seriously impact businesses all over the state if legislators get on board with Rauner.
Pennsylvania Governor Tom Wolf recently saw his proposed budget, which would add sales taxes to a range of business-to-consumer transactions while leaving business-to-business sales tax-free, knocked down by the Pennsylvania House of Representatives 193-0. But, with a budget deficit of over $2 billion, it’s likely Pennsylvania residents haven’t seen the last of services sales tax proposals.
Sales tax on services is an area of law that is complex — and it’s getting more complicated all the time. Check out Avalara’s guide to service taxability in all 50 states to learn more about which services are taxable in your state.