Sales tax (also known as transaction privilege tax) can often be a confusing, and let’s admit, fairly dull topic. It is not always clear what products and services are subject to sales tax and rules vary by industry. As a business in Arizona, you are responsible for paying sales tax on taxable items whether or not you have collected it from your customers, so it is important to make sure you know the law.
Included are a few topics that have come up recently at Tax Goddess Business Services®, PC.
Software – Is it taxable? Answer: Depends
Software created for a specific company that can not be adapted for use by any other business (sometimes referred to as proprietary) is exempt from sales tax. However, “off the shelf” software that can be used by a variety of clients (even if you are just selling the license key) is subject to sales tax. A common misconception is that hosting software on a server is exempt from sales tax. But if you charge a fee for this hosting, then that is subject to sales tax under the leasing tax code.
Labor – Is it taxable? Answer: Depends
The answer to this question depends on your industry. If you are making changes to real property, you are considered a contractor. As a contractor, you are required to pay sales tax on the entire project. However, there is a 35% reduction of the total job before sales tax is applied. As a retailer, labor costs may be excluded from sales tax as long as they are separately stated on the invoice. Some industries may have both retail and contracting activities. A carpet installer, for example, is a contractor when installing in a home, but is considered retail when installing the same carpet in an RV.
Ticket Sales – Is it taxable? Answer: Yes
If you are selling tickets to an event, the sales of tickets are subject to sales tax under amusements.
Service Industries – Is it taxable? Answer: In general, no
Service Industries such as attorneys, accountants and consultants are not required to remit sales tax, however, there are some exceptions to this that are industry specific. Photography, telecommunications and web-based advertising are required to remit sales tax.
Use tax defined is a type of tax imposed on both businesses and individuals. Generally, you are supposed to pay use tax if you purchase an item without paying state sales tax and you subsequently use, give away, store, or consume that item in your home state.
An example of this would be a business that sells health care products wholesale but also uses some of these items for display and for personal use.
Remember that in Arizona the burden for sales tax falls on the seller. You may have clients that are not required to pay sales tax to you (non-taxable customers) because they will, in turn, re-sell your products or combine your products into a contracting activity. In these cases, just be sure to keep resale certificates in your files for these customers.
We know that sales tax and use tax are complicated topics and we’re here to help. If you have any questions, please call or email our experts at Tax Goddess Business Services®, PC, Scottsdale CPA