A new service tax is possible in MA – what does this mean for service businesses and customers?
Any new statewide tax is sure to have an impact business: That’s why, when Massachusetts again considers a new service tax, it’s bound to raise some curiosity and concerns. As the service tax conversation enters the political mill, it’s a good time to explore just what a service tax is and what it means for businesses operating within the state.
- A Service Tax Rarely Applies to All Services: While the exact nature of the MA service tax (which isn’t even in bill form yet) is still to be determined, the service tax is rarely a blanket tax on all services. Even within the state, the other proposed service taxes in past years – ultimately rejected – targeted things like computer services. This allows the service tax to deal with specific imbalances in the state rather than tax all professional services…which nonetheless remains a possibility.
- Service Taxes Can Be Used to Reduce Taxes in Other Areas: This is an attractive strategy. For example, if state retailers are losing money and customers to online retailers, states may be worried about the loss of taxable income. As a result, they may impose a tax on related services and reduce taxes on in-state retailers to give them more of an advantage. This is also applicable in Massachusetts, where a reduction is sales tax is currently be considered and may be made up in other areas. It also tends to affect upstream costs for online retailers more than other businesses.
- Residential and Commercial Taxes Tend to Differ: A common choice for state service tax is property improvement, which is also a good example of how residential and business taxes are treated differently. States try to promote residential growth by making all residential property services exempt from taxes but charging the tax for commercial improvements. Obviously, this can be a controversial move, but it is standard practice in these taxes to separate consumers and businesses with various exemptions. For example on the other side, personal services like visits to a salon may be taxed, while companies left alone. A lot depends on the goals and perception of the tax.
- Companies Often Experience a Lot More Scrutiny: Customers are quick to seize on a new service tax as a reason to dissect their bills and look for things that don’t make sense. This can quickly grow into a headache for companies affected by the service tax. If a new tax does loom on the horizon, it’s a good time to simplify pricing and fees and leave nothing hidden for customers to target if they become annoyed.
- Taxing Services is Growing More, Not Less, Likely: Many states have not tried many service taxes, and are looking at this as a new way to raise the tax revenue they receive without raising any current taxes, which tends to have bad optics. In recent years we’ve seen new taxes on car wash services, clothing work, and fitness services, among other industries. That doesn’t entirely mean that a service tax is coming, but it should be expected sooner rather than never.
- It’s Important to Understand New Rules Fast: When a service tax does hit, it’s important to immediately consider if any business billing or accounting practices should be changed. The good news is that a service tax is similar to a sales tax and is generally easy to incorporating into existing accounting systems with a little automation. However, don’t neglect this step and get caught off guard.