The Gift that Keeps on Giving: Sales Tax on Services

By Orlando Gotay, Tax Attorney

To my readers who are really, really retired, I say, “Congratulations.” Isn’t Mexico a great place to relax? This is for all others who decided not to wait, leading an active work life from Mexico, not letting geography hinder them. Quite a few have figured a way to telework. In other words, develop a revenue source from the other side. In an earlier life, when I was running the US Maritime Administration (before I ever dreamed of Mexico), I heard of a fellow who did public relations for a Florida port from his home somewhere in Mexico. You get the idea. Because this is a tax article, I need to let you know that the good ol’ sales tax may lurk out there, waiting for you. Say what?? For the longest time sales taxes were imposed on stuff—tangible personal property. The laptop I am writing this on is an example. The cerveza you may have nearby, another. Sales taxes are taking an interesting twist. Some states have begun taxing services. In the beginning, the only services taxed were those connected to an item, like the cobbler that puts on a heel and sole—well, no longer. Hawaii, New Mexico, South Dakota, and West Virginia have the broadest definition of taxable services, sweeping most in the hopper, including (gasp!) legal services (SD). Others tax specific services, some as specific as landscaping services. You still say, “Why should I care?” Well, each of these states may look at your level of activities in their state to determine if you have enough presence to require you to register and collect sales taxes on services sold there. Do you visit trade shows, hand out samples, have employees or contractors visit? Do you sell widgets online and are your refunds processed in that state? Do you promote your business there? You may have sufficient connection with one of these states. That’s called “nexus.” If you have nexus with a state, take heed. If you don’t register and collect the tax due (from the purchaser), you the seller are on the hook for it. Uh, what about that South Dakota license plate? The more in-state activities, the more likely you will be found to have nexus. There are new and evolving schemes, ready to spring on the unwary. State revenues continue to drop and they are always looking to get more. Don’t let them get you.

Orlando Gotay is a California-licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at tax@orlandogotay.com, online radio at mixlr.com/orlandogotay or Facebook: GotayTaxLawyer.

 

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