Although the US economy is “dominated by service-oriented businesses”, most states currently only tax certain services, if any. That could change in 2022: legislation to tax services has been introduced in Indiana and Nebraska, and other states could follow suit.
[From the Avalara blog.]
Indiana sales tax would apply to most services starting in 2023
A bill to tax sales of services and phase out corporate income tax has been introduced in Indiana. If Senate Bill 372 becomes law, Indiana sales tax would apply to most state services beginning January 1, 2023. The bill also seeks to reduce tax rates. personal income tax and to phase out Indiana’s adjusted gross income tax (AGI).
SB 372 proposes to extend Indiana’s state sales and use tax (currently 7%) to “any activity performed for another person, if the person purchases the service as a user end of the service for consideration”. However, the following services would be exempt:
- B2B transactions (i.e. “the wholesaling of services that are performed by one business and rendered to another business for use or consumption in the production of tangible personal property or the rendering of other services which are intended for sale”)
- Government services
- Services rendered by an employee
According to the tax analysis of the bill, extending the state’s 7% sales and use tax to services effective January 1, 2023 “would have an estimated net impact of $1,936.2 million. to $2,204.2 million in fiscal year 2023 and from $4,902.9 million to $5,581.4 million in fiscal year 2024.”
The bill would also implement an additional social media provider tax on social media providers that derive “economic benefit from the data that Indiana individuals share with the company” and have a platform. -public form of social media, over 1 million active account holders in Indiana and an annual account. gross revenue (from social media advertising services in Indiana) of at least $1 million.
Nebraska sales tax would apply to services starting October 1, 2022
A 2021 bill delayed to 2022 would expand the sales tax to services and gradually reduce the state sales tax rate. LB 422 assumes that the services are taxable “unless a specific sales tax exemption applies”.
The measure defines “service” as “all activities performed on behalf of others for remuneration and which primarily involve the performance of a service, as opposed to the sale or rental of tangible personal property” . Services “rendered by an employee to his employer” would not be subject to tax.
If LB 422 succeeds in this round, the service tax would come into effect on October 1, 2022.
Other states may propose taxing services in 2022 or beyond
Proposals to tax certain services could also surface in other states, especially states that have recently tried to increase their sales tax. There’s plenty of room for movement on this front, given that Hawaii, New Mexico, and South Dakota are the only states that tax all but specified services.
Texas has sought to tax many services in 2021, including specified professional services. West Virginia Governor Jim Justice proposed taxing professional services during his 2021 State of the State Address, when he also launched a plan to raise the sales tax rate and to levy an additional tax on cigarettes and sodas, to make West Virginians “healthier and better.” We’ll see what he says in 2022. (Governor Justice was scheduled to deliver the 2022 State of the State Address on Jan. 11, but postponed it after falling with COVID-19.) Many services are already subject to West Virginia sales tax, although personal services, professional services, and utilities are not.
West Virginia has also considered taxing digital ad services in 2021, as have Connecticut, Indiana, Massachusetts, Montana, New York, Texas, Washington, and Washington, D.C. (Maryland currently has the only country’s digital advertising tax). Wyoming has considered a tax on digital streaming in 2021, and the West Virginia state tax department has said streaming services are after all subject to sales tax.
Why taxing services can be tricky
Despite clear potential for revenue gains, attempts to tax services are generally rebuffed. About 23 states proposed taxing at least some services in 2017, and most measures failed. Nebraska attempted to extend the sales tax to services — unsuccessfully — in 2020 and 2021. Where such proposals succeeded, such as in Washington, DC, they typically targeted services not backed by powerful lobbyists.
Scott Peterson, vice president of government relations at Avalara, offers some insight. He says the complicated part of tax policy changes like the one being considered in Indiana is not estimating how much tax a different tax will produce relative to the current tax; it’s about balancing who bears the tax burden. “This idea will be resisted by many companies, including those that will become new tax collectors and those that buy a lot of services. It will also be opposed by those who believe that income taxes are a fairer method of distributing the state’s tax burden among people and corporations doing business in the state.
He also notes that lawyers and accountants, who would become tax collectors under SB 372, “have very good lobbyists.”
Learn more about issues affecting sales tax compliance this year in Avalara 2022 Tax Changes.
Gail Cole is a senior writer at Avalara. Her mission is to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals.