Sales taxes on services — it’s a growing trend. As states see revenues shrinking, they’re increasingly turning to sales taxes on services. Taxing entities are thinking about the increase in revenue they expect will come from taxing services. But just as a pebble dropped into water sends ripples all the way to the edge of the pond, sales taxes on services may have consequences. Here are some of the things experts predict businesses might do to cope with sales tax confusion: Move their shops. Small to medium-sized businesses may find it just as easy to move out of a tax jurisdiction as to begin charging sales tax. Denver is seeing this happen in the wake of its controversial tech tax. Focus on their local communities.
If taking work from other jurisdictions becomes complicated and confusing, small service businesses might just stop taking on those jobs. Look for loopholes. In some jurisdictions, for example, photographers don’t have to charge sales tax if they allow customers to download photos online rather than giving them prints. The complexity of sales tax laws could allow businesses to slip out of charging sales taxes on services. Cut back. In response to the added costs involved in collecting and remitting sales taxes correctly, businesses may have to scale back in other areas. If the price hike to consumers results in lower sales, some businesses may have to scale back a lot. Lobby. In communities across America, the institution of new sales taxes invariably sparks protests and lobbying for exclusions. Wealthier, better-organized industries may be the winners. Hire bookkeepers. Many small service businesses operate without much support staff. That could change.
Quit hiring other services. In some cases, business-to-business services are being taxed. Adding sales taxes might encourage companies to get those services covered in-house and increase local hiring. Outsource further afield. Hiring services at Elance or oDesk rather than locally might also be an option businesses choose. Do without. Plenty of small businesses already do without things like legal services which they truly need, opting instead to download sample contracts from the web or to function without them. Automate. Businesses that haven’t previously had to collect and remit sales taxes will find that automating the process with sales tax filing software will be less costly than hiring a new worker with sales tax expertise. Some of these options could have positive effects; some could have negative effects.
There is almost certain to be a shake-out as service businesses already operating close to the financial edge find this extra push too much to handle, as consumers decide which services they’re willing to pay sales taxes for, and as solutions are developed within the business community. Companies that take the time to prepare for the possibility of sales taxes on services will be in a stronger position than those that wait and react after it happens.
