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Do I Need to Include Sales Tax in My Service Contracts?!
Did you know that in certain states, you have to charge for sales tax, even if you are a service based business?! This week I’m going to give you the tools to figure out if you need to be including a sales tax fee in your client’s invoices or not. I know we aren’t currently in the middle of tax season, but it is the middle of wedding season and this issue is applicable to many in the wedding industry including wedding planners, photographers, calligraphers, and creatives. So, its a good time to talk about taxes and when to include sales tax in your service contracts for your clients!
Step One: Does Your State Have Sales Tax?
The first thing you need to do is figure out if your state has a sales tax. Unless you live in one of the five states that doesn’t have sales tax, your answer is YES! The five states without sales tax are (1) Alaska, (2) Delaware, (3) Oregon, (4) Montana, and (5) New Hampshire. If you work in one of these five states, this blog post isn’t relevant to you BUT it is always good to learn about in case your state decides to adopt a sales tax in the future.
Step Two: What Kind of Sales Tax Does Your State Have?
Once you’ve determined that your state has sales tax, you need to figure out what type of sales tax your state has. In other words, you need to find out the general information about your states taxes. There are two different kinds of sales tax. There is product based sales tax, which taxes products and goods when you're a consumer at the store buying products, and there's service based sales tax, which taxes any services you hire out. If your state has service based sales tax AND you service tangible goods as part of your sales to customers (like a calligrapher designing an tangible wedding invitation), then you definitely have to include sales tax in your service contracts.
It isn't that black and white though.
Thus, if you are a photographer, you need to ensure that your state does not include photography as a product. Some states are creating a more nuanced approach to sales tax and are including photography as a “product” because photographers produce final digital images at the end of the service. If you’re a wedding planner, you likely aren’t producing a final product and don’t need to charge sales tax. This is because you are simply creating a tablescape or using calligraphy and floral pieces, which is putting other products together. Some states are also including other services under their definition of products, so make sure to find out if your state includes the service you provide under product based sales tax. You can do this by calling your state’s department of revenue office.
What This Means for You!
If your state considers your service a product under sales tax or your state has service based sales tax, then it is 100% appropriate to include sales tax in your invoice and charge your client that fee. It is always good to be honest and upfront about the TOTAL fees and costs your clients will be incurring, and not hiding this additional charge until the end.
If you live in a state without sales tax, don’t worry about this! You do not need to include a sales tax fee in your service contracts. Even if your client is from out of state, you do NOT need to charge them for sales tax because they are buying your services in your sales tax free state.
I know this area of law is getting tricky as states redefine what is considered a “product”, but with a little due diligence and some research about your state, you can be prepared to comply with your state tax requirements!