When it comes to running a successful business, bookkeeping might be just a very tiny part of it, but it is a very crucial aspect of running a business because any mistakes in your account and even taxes can get you into a lot of trouble.
Breaking it down, bookkeeping is the recording, on a day-to-day basis, of the financial transactions and information pertaining to a business. It ensures that records of individual daily financial transactions are correct, up-to-date and comprehensive.
Bookkeeping provides the information from which accounts are prepared. It is a distinct process that occurs within the broader scope of accounting, and they are under the same industry.
The person responsible for carrying out bookkeeping services record all transactions that are related, including but not limited to:
- Expense payments to suppliers
- Loan payments
- Customer payments for invoices
- Monitoring asset depreciation
- Generating financial reports
As we move towards a more service-oriented economy, states are taking notice and extending sales tax to various types of services. But it can be hard to know if the services you provide are or aren’t taxable or if they’re taxed in some jurisdictions but not in others.
Are Bookkeeping Services Taxable in Different States in USA?
As the United States has shifted from a manufacturing-based economy to a service-based economy, many states in a bid to boost their internally generated revenue, started to impose sales and use tax on services as well. Many businesses that provide services are still unaware of these statutory changes—some even still believe they don’t have to pay any sales tax at all, even if they’re selling services all over the United States.
It is on record that five U.S. states (New Hampshire, Oregon, Montana, Alaska and Delaware) do not impose any general, statewide sales tax on goods or services. Of the 45 states remaining, four (Hawaii, South Dakota, New Mexico and West Virginia) tax services by default, with exceptions only for services specifically exempted in the law.
This leaves 41 states — and the District of Columbia — where services are not taxed by default, but those enumerated by the state may be taxed.
Though we have seen states that categorically state that they do not tax service businesses such as bookkeeping services, but it is quite difficult to point out the states that task bookkeeping services because every one of these states tax a different set of services, making it difficult for service businesses to understand which states’ laws require them to file a return, as well as which specific elements of their services are taxable. For example, dry cleaning and haircuts are subject to sales tax in Iowa, but not in Idaho.
It should be noted that three states already tax professional services and these taxes do not exempt accounting services, bookkeeping services inclusive. The states are Hawaii – 4%, New Mexico – 5%, and South Dakota – 4%.
Some states also have taxes that affect (but do not specifically target) the accounting profession. For example, Delaware imposes a gross receipts tax of .004% on monthly receipts over $100,000, and the state of Washington has a 1.8% business and occupation tax on service providers.
Sales taxes in the United States are taxes placed on the sale or lease of goods and services in the United States. Sales tax is governed at the state level and no national general sales tax exists. 45 states, the District of Columbia, the territories of Puerto Rico, and Guam impose general sales taxes that apply to the sale or lease of most goods and some services, and states also may levy selective sales taxes on the sale or lease of particular goods or services. States may grant local governments the authority to impose additional general or selective sales taxes.
Sales tax is calculated by multiplying the purchase price by the applicable tax rate. The seller collects it at the time of the sale. Use tax is self-assessed by a buyer who has not paid sales tax on a taxable purchase. Unlike the value added tax, a sales tax is imposed only at the retail level. In cases where items are sold at retail more than once, such as used cars, the sales tax can be charged on the same item indefinitely.
Sales taxes are imposed only on taxable transfers of goods or services. The tax is computed as the tax rate times the taxable transaction value. Rates vary by state, and by locality within a state. Not all types of transfers are taxable. The tax may be imposed on sales to consumers and to businesses.
Most states tax some services, and some states tax many services. However, taxation of services is the exception rather than the rule. Few states tax the services of a doctor, dentist, or attorney. Services performed in connection with sale of tangible personal property are often taxed. Most states, however, tax services that are an integral part of producing goods, such as printing or cabinet making.
Telecommunications services are subject to a tax similar to a sales tax in most states. Only a few states tax internet access or other information services. Construction services are rarely taxed by states. Materials used in construction of real property may be subject to sales tax to the builder, the subcontractor, or the person engaging the builder, or may be wholly exempt from sales tax.
How states determine sales tax on services
There are two ways for states to approach taxing services:
- Impose tax on specifically enumerated services (all others are exempt)
- Impose tax on all services, except those specifically exempted
Four states take the second approach, imposing sales tax on all services except those specifically exempted by law: Hawaii, New Mexico, South Dakota and West Virginia. Five states tax fewer than 20 services: Colorado, Illinois, Massachusetts, Nevada, Virginia.
The majority of states take the first approach, applying sales tax to only certain, specifically enumerated, services. And five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not have a general sales tax.
How states define services
Services are generally broken up into four categories:
- Business services
- Personal services
- Professional services
- Maintenance and repair services
Business service: These services are ones that are primarily consumed by businesses. These are numerous and include advertising, computer services, human resources services, lobbying and consulting, and payroll services. Some surprising states, including New York, Texas, and the District of Columbia, tax several business services including bookkeeping.
Personal services: Personal services are services that are primarily consumed by individuals, although they may also be purchased by businesses. They include dry cleaning, hair care, hunting and fishing guide services, and tanning. Hawaii, New Mexico and South Dakota tax all personal services; a few other states tax most personal services.
Professional services: Professional service providers include architects, attorneys, doctors, engineers—people who need to obtain special certification, education and licensing in order to practice in a state. As with personal services, they are consumed by both businesses and individuals. Little or no tangible personal property is involved in these transactions, but when it is (e.g., architectural or engineering plans), taxability can be impacted.
Again, Hawaii, South Dakota and New Mexico tax a broad range of professional services. States that don’t tax the service typically tax the business inputs.
Repair, maintenance and installation services: Repair, maintenance and installation services can be provided to tangible personal property (like your refrigerator or car) or to real property (like your house).
Often—but not always—these services are taxable if the tangible personal property (TPP) is taxable and exempt if it’s exempt. It can be critical for businesses to separately state service charges on invoices that include TPP, as some states exempt services if they’re separately stated but tax them if they’re combined.
The taxability of services provided to real property often hinges on whether the property is residential or commercial and whether the project is new construction or a remodel. Here again, the fact that tangible personal property is often involved (e.g. materials) can complicate taxation. To make matters worse, states don’t define construction services in the same way.
Taxing rules for services
Determining whether or not a service is subject to tax in a particular state is the first step. Next comes figuring out the proper rate to apply to the transaction. This can be complicated because states source the sale of services in one of two different ways:
- The location where the service is performed
- The location where the benefit of the service is received
Often the location is the same, as when hair is cut or a car is repaired. But that’s not always the case. In fact, one reason many states have opted not to tax many professional services is because it’s easy to purchase those services from providers located in other (more tax friendly) states.
Once sourcing is understood, varying rules and rates can come into play and make sales tax compliance more complex. For example, confusion can arise when a service provider is located in a state that applies tax based on where the service is performed but the consumer is located in a state that applies tax based on where the benefit is received. This can be a case with bookkeeping services where the service can be carried out remotely.