Stumped by Sales Tax? 5 Tips to Calculate Tax Rates in Multiple Service Zones

1. Know which tax jurisdiction applies to your company

With more than 12,000 overlapping sales and use tax collection jurisdictions in the U.S., service companies need to know which tax laws apply to their business, how tax exemptions work, and how to keep their tax accounts in good standing.

Maughan says the variances in tax rates can fluctuate from one city block to the next in some areas.

“The airport in Colorado has three taxing jurisdictions in it. So, you could buy a bottle of water and pay a different tax rate in three different places in the same building,” Maughan says.

Chris Hunter, ServiceTitan’s Director of Customer Relations, says laws in Oklahoma were so lax and unclear, service companies usually just pay the sales tax when they buy equipment from a manufacturer, but they often forget to charge the homeowner.

In Texas, it’s even more confusing.

“You have to charge sales tax only on materials for commercial jobs, and then each municipality may have different rates. So, it gets super complex,” Hunter says. “That’s why it’s so important to do your homework and due diligence to know what you’re supposed to do. Then, set up a program to simplify this. Otherwise, it can be a major tracking nightmare for the office people.”

Remote sellers like Amazon and Wayfair complicate the calculation of state sales tax rates even further. A U.S. Supreme Court ruling in 2018, in the case of South Dakota vs. Wayfair, essentially paved the way for individual states to set their own rules and laws for collecting sales tax on remote sales—or services provided by a contractor in another state or taxing district—via their economic nexus laws. 

Since the Wayfair ruling, 43 out of the 45 states with sales tax have adopted some form of economic nexus, Maughan says.

When determining economic and physical nexus, tax laws vary by state. For example, Kansas wants to collect sales tax on all remote sales, whereas in California and Texas the sales tax kicks in after a company reaches $500,000 in sales. Alaska, on the other hand, collects no state sales tax, but numerous municipalities levy their own sales tax.

2. Stop the monthly invoicing wild goose chase

If your company works in different tax jurisdictions and your bookkeepers use multiple invoicing systems to calculate total tax owed each month, you know how much time and effort it takes to keep your service business tax compliant. 

"Whether it's one state or multiple states, you have to sometimes go to different systems, patch together all these different numbers, all these different liabilities, put them on the forums, go to the gateway, sign in, put in your numbers, put in your routing numbers, send them their money, and then do it state-by-state," Maughan explains.

Rather than trying to track down all gross receipts and cram every transaction in before the end of the month, Avalara tax compliance software provides one clearinghouse for all transactions, applies tax liability rules to each line of every invoice, and submits sales tax returns on your behalf.

“Avalara's returns process works, because we're capturing all of your transactions and we prepare the returns for you,” Maughan says. “We want to turn staff into someone who verifies, not sits there and produces these actual returns.”

Hunter says service company owners worry about what to charge the customer, whether they’re charging sales tax correctly, and how to report it accurately.

“How can I make sure my technicians charge the right rate every time and don’t mess this up? Because, the last thing any of them want is to get some sort of audit and find out they messed this sales tax thing up, and they owe money they might not have at that time,” Hunter says.

3. Avoid tax information confusion 

Typically, a seller adds a sales tax to the sale price of a product or service, and the seller collects the tax from the customer and remits the collected tax to the appropriate taxing jurisdiction.

States may impose different types of sales taxes, depending on whether they’re a seller-privilege state or a consumer-use tax state. 

In a seller-privilege state, the seller must pay the tax—whether they collect it from the purchaser or not—for the privilege of doing business in that state. In consumer-use tax states, the seller collects the tax and the buyer assumes responsibility for payment. Buyers pay the use tax rate for the privilege of using or consuming the products or services purchased.

Most states in the U.S. fall under consumer-use tax regulations. However, some states may impose both a sales tax and a consumer use tax rate. In New York, for instance, the state imposes local sales taxes on taxable property and services purchased or delivered to customers in the state. It also imposes a use tax on the use of taxable services when no sales tax has been paid.

For contractors in the skilled trades, product taxability causes the most confusion. A service company may buy certain materials tax-free and use them on a job site, but fail to charge the state's applicable sales or use tax to the customer. This often happens with selling warranties, lump-sum invoicing, or promotional giveaways.

“The buyers are responsible to make sure taxes are paid on that,” says tax consultant John Sallese. “When you get that stuff in, you need to make sure you're self-assessing tax correctly on those purchases, because you're going to owe it.” 

Since it's simply not practical to ask your field technicians to understand and calculate complex sales tax rules when creating a job estimate, companies turn to a software solution like Avalara to handle the heavy lifting.

“For product taxability, we go line-by-line as you populate an invoice and we maintain all of these rules for each line of that invoice, so your salesmen or your field reps just have to populate the invoice,” Maughan says. 

4. Figure amount of tax owed on real property vs. personal property

Another source of confusion for service-business taxpayers involves knowing the difference between personal property and real property when reporting total sales or compiling use tax returns to prepare their companies for mergers and acquisitions. When companies present clean books to a potential buyer, the transaction typically goes much smoother.

• Personal property represents anything that can be moved and owned, except land. 

• Real property remains fixed to a specific location, and includes the land and anything attached to the land.

Personal property can also involve sales of tangible personal property, such as business equipment and tools, company vehicles, and office furniture—and the sales tax you paid. In comparison, intangible personal property might include stocks in the company or intellectual properties.

Seek additional information from local tax experts or invest in a software solution that figures each property tax for you.

5. Be use-compliant when buying supplies for multiple locations

Enterprise companies that provide more than one service in multiple locations may not realize they owe a consumer use tax on certain items. For example, your controller may purchase mobile tablets or motor vehicles from one state retailer, but then send them to office staff and service techs who will use them in four or five different locations.

Each location may fall under a different purchasing jurisdiction—with its own, unique consumer use tax, due date, reporting period, and rate changes that your company needs to know and pay, so you can stay in compliance with each district tax.  

“Checking to make sure you don't owe consumer use tax, as you can probably guess, is a somewhat resource-intensive issue,” Sallese says.

AvaTax sales tax calculator

Make sales tax calculations easier with Avalara's AvaTax calculator, which calculates applicable taxes for products and services, based on your company's specific transactions. 

“As you map your products and services from ServiceTitan or map them into AvaTax, it identifies what you're selling and where you're selling it," Maughan says. "We’ll maintain the taxability on the back end of that.”