Do I Need to Include Sales Tax in My Service Contracts?!

Updated 2/22/24

Did you know that in certain states, you have to charge for sales tax, even if you are a service based business?! As a service provider, understanding the ins and outs of sales tax in your contracts is crucial for ensuring compliance and protecting your business. While sales tax regulations may seem complex, especially in the realm of digital goods and services, staying informed can help you navigate these waters with confidence. In this post, we'll explore key considerations for including sales tax in your service contracts and how recent developments in state taxation of digital goods and services may impact your business. 

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. 

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 state's taxes. There are two different kinds of sales tax. There is (A) a product based sales tax, which taxes products and goods when you're a consumer at the store buying products, and (B) a service based sales tax, which taxes any services you perform for clients.

In the past, almost always tangible products bought and sold in-person were the only ‘products’ per say that were subject to sales tax. But, in recent years, over half of the U.S. states have updated their sales tax laws to include digital goods and services. This shift reflects the growing prominence of digital transactions in today’s economy and aims to ensure that digital providers contribute their fair share of tax revenue.

Let’s take a closer look at how these developments impact a few select states:

Washington: In Washington state, sales tax applies to digital goods and services, including digital downloads like photography and videography. The only exception to this is digital goods used solely for business purposes.

North Carolina: North Carolina has also extended its sales tax to cover digital products and services such as photography, videography, graphic design, etc.

Florida: As of January 1, 2024, sales of digital products and services are still tax-free given that items sold in digital form aren’t classified as personal property. However, if you’re a photographer and you physically print pictures or offer framed prints or an album, those are subject to tax.

California: In California, sales tax usually does not apply to digital goods and services, such as photography. It would only apply for tangible personal property like albums or prints.

Colorado: Colorado recently decided that digital goods or services that qualify as tangible personal property are subject to sales tax. This includes photography.

Georgia: Beginning on January 1, 2024, Georgia recently joined in and now taxes sales tax on digitally downloaded products.

Again, BE AWARE TAX LAWS ARE SUPER NUANCED PER STATE! So make sure you research your own state tax laws on this if you are wondering whether you should charge tax on your digital goods or services. The best way to do this is to search on Google for “sales tax on digital products or services” in “x state” and be sure you find your answer on a true government website (one that has .gov or is a department of revenue source). Or, you can contact a Bookkeeper or CPA here from our list of trusted professionals and get the answer straight from them!

Step 3: ​Incorporate Sales Tax into Your Service Contract

When drafting service contracts, it's essential to clearly outline the applicability of sales tax. This includes a “Sales Tax” clause specifying whether your fees are inclusive or exclusive of sales tax and clearly stating the percentage or amount of tax to be charged on your client’s invoice. 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. Also, remember, you are responsible for remitting the tax to the appropriate tax authority, so if you don’t properly collect it from your clients you are going to pay the sales tax out-of-pocket.

Here at The Legal Paige we know this area of tax law is getting tricky as states redefine what is considered a “tangible product” and start qualifying “digital goods and services” as taxable, but with a little due diligence and some research about your state, you can be prepared to comply with your state tax requirements!

THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.
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