Do You Pay Taxes for Consulting Services?

The first sales tax laws required taxation of tangible personal property and did not tax services. In the meantime, the United States has transformed from a manufacturing-based economy to a service-based economy. We currently spend more on services than goods. 

Therefore, some states have started implementing sales and use tax on services. Every state has its own guidelines for taxing services. So, are you required to pay sales tax on consulting services? 

Consult a tax professional who knows what is required in every state so that you stay compliant with all tax regulations. Unfortunately, many business owners are unaware of the sales tax required from service businesses.

General Taxes on Informational Services

Sales tax is not subject to federal regulation. Instead, each state has control over its own sales tax so the revenue can help balance each state’s budget. Sales tax is applied to retail transactions and certain services. 

When it comes to services, some states impose tax on information services. In New York, information services is defined as a business that collects, disseminates, and analyzes  information that is conveyed through reports and printed information and handed over to clients in exchange for a fee.

When it comes to sales tax on services, some states consider that services are taxable only if specifically designated. New York, along with some other states, charge tax on receipts from the sale of information services. The key is in determining if the service is classified properly as an information service based on its definition and how the information is conveyed.

Consulting and Information Services Exempts

The service industry includes a vast array of businesses which can be broken down into different types of services. These categories include the following:

  • Services to tangible personal property
  • Services to real property
  • Business services
  • Personal services
  • Professional services
  • Admission to amusement parks and recreational events

Under the New York Sales Tax Law, personal information that would not be incorporated in a report provided to other individuals is specifically exempted from taxation.

Other cases that went to trial resulted in environmental risk assessment reports, digital advertising effectiveness reports, and actor casting facilitation services being nontaxable consulting services.

The dividing line of whether an information service is taxable or not falls between two questions pertaining to the business. Is the business’ primary function to collect and disseminate information or is it merely to sell the information? If the answer to the question is that the primary function is to collect and disseminate information, then the service may very well be taxable.

Does My State Charge Taxes for Consulting Services?

Sales tax regulations vary from state to state as do the sales tax rates. States tax services in one of two ways. They either impose tax on designated services while all others are exempt or they charge tax on all services except for those that are specifically exempt. 

Most states do not charge sales tax on consulting services, however, there are a few states that do. States that do charge sales tax on consulting services include Connecticut, Delaware, Hawaii, New Mexico, and South Dakota. That leaves the remaining 45 states that do not charge taxes on consulting services.

While most states charge sales tax on goods, there are six states that don’t impose any general state sales tax on goods or services. These states include Alaska, Montana, Hawaii, Oregon, New Hampshire, and Delaware. The other forty-four states do levy sales and use taxes either on services and tangible personal property or both.

There are three states that impose sales and use tax on all types of consulting services and business management. New Mexico, West Virginia, and Rhode Island tax any service that is not specifically exempt. Most of the remaining states exempt consulting services and business management from their sales and use tax. 

However, there are three exceptions. New Jersey specifically charges tax on information services. New York taxes information services with the exception of the exemptions mentioned above. South Dakota is subject to sales tax to all but specifically exempted services.

Conclusion

The taxation of information services in New York can be very complex, time-consuming, and costly, especially if it leads to audits and litigation. That’s why it’s so beneficial to turn to a tax professional who can be proactive and shoulder the responsibility of adhering to the proper legal handling of sales tax on consulting services under the New York Sales Tax Law. Contact us today and we will ensure the proper sales tax compliance of your consulting service.