FTA Releases 2004 Survey on State Taxation of Services
[published in May 2005 issue of Tax Administrators News]

[printable pdf version]

During the past several decades, the U.S. economy has shifted in configuration,  redefining itself as an economy where increased activity is based on service related transactions. While the sales tax systems in most states were originally designed to tax transactions of tangible goods, a number of states have been able to incorporate various types of services into their sales tax bases. To assist state tax policymakers in better understanding the issues and possible solutions, FTA undertook an in-depth survey in 1990 to determine the breadth of state sales taxes as applied to services. It was updated in 1992 and again in 1996. This article discusses FTA’s recent update of the service taxation survey to include services taxed as of July 1, 2004.

The survey catalogs state practices in the taxation of over 160 service-related transactions under the general retail sales tax or another special excise or gross receipts tax. With the 2004 update, four new services were added: Dial-up Internet access, broadband internet access, direct satellite TV, and architectural services -- bringing the total to 168 services.

A comparison of the aggregate data from the 2004 and 1996 surveys shows only minor changes to how services are taxed in the states. The strong economy and growing revenues has led state policymakers to be reluctant to impose tax increase or newtypes of taxes. Indeed, no state has undertaken a broad-based expansion since Florida in 1987 and Massachusetts in 1990, which were both later repealed. Nebraska was the only state to pass legislation enacting new services to the sales tax base.

Since the 1996 survey, most states made only minor changes adding or removing a few selected services from the sales tax base. However, in 2002, Nebraska policymakers enacted legislation eliminating exemptions for certain services taxable in neighboring states. This legislation increased the number of services taxed from 49 (as recorded in the 1996 survey) to 76 (by 2004). These increases came in the following areas: Business taxes, added nine services; repair services, adding eight services; and seven other miscellaneous services were also added.

The accompanying figure summarizes the types of services added to the tax base between the 1992 and 1996 surveys, and then between the 1996 and 2004 surveys. By presenting the number of states adding or exempting at least one service to each category, the figure illustrates the categories with the most change in services taxed. It also shows how few states made changes in the number of services taxed. Most of the activity during both periods is in the business service category, with 12 states adding new business services in 1996-04 and 10 in 1992- 96. Meanwhile, four states removed at least one business service from the tax base. The next most common category to see increases was personal services, with ten states adding services and seven removing services. The computer services  categories saw five states exempting a service, with only three adding a service. Still, no state added any new professional services to the sales tax base during either period.

Total States Increasing/Decreasing Services Taxed, 1992-2004

 

The accompanying table summarizes the number of services each state taxes by major category. While it shows how most states apply taxes to certain admissions, utilities and lodging services, the table also illustrates the wide variation in the degree they tax other services. Only Hawaii and New Mexico have broad-based sales taxes that include almost all the services (160 and 156, respectively) tracked by the survey. Delaware and Washington tax a large number of services, mainly through their low-rate business gross receipts taxes. South Dakota and West Virginia are the only other states to tax more than 100 services.

Several other states tax a large number of selected services. These include Arkansas, Connecticut, District of Columbia, Iowa, Kansas, Mississippi, Nebraska, Texas, and Wisconsin. These states widely tax utilities, admissions/amusements and labor and repair services, but leave professional services largely untaxed. Within this group, Connecticut, the District of Columbia and Texas tax more computer services than is the norm for most states.

Of the four services added to the survey for 2004, architectural services were taxed by the fewest states—the five states taxing other professional services. Satellite television is taxed in 21 states, compared against 25 that tax cable TV. Also, many of the states exempting satellite TV still tax the sales or rental of equipment. Finally, dial-up internet access is taxable in 11 states, while broadband service is taxable in 15 states.

The FTA work on the taxation of services is intended to assist state tax administrators and others in assessing the potential for and the implication of taxing services. The 2004 Survey data are now available for download from the FTA website (excel spreadsheet).

 

 
Fabrication,
 
Personal
Business
Computer
Admissions/
Professional
 Repair &
Other
 
Utilities
Services
Services
Services
Amusements
Services
Installation
Services
Total
                   
Alabama
12
2
6
3
10
0
1
3
37
Alaska /1
0
0
0
0
0
0
0
1
1
Arkansas
16
7
12
1
12
0
11
13
72
Arizonia
12
2
5
1
11
0
2
25
58
California
4
2
7
2
1
0
3
4
23
Colorado /1
4
0
2
1
2
0
3
2
14
Connecticut
10
9
20
6
10
0
11
14
80
Delaware /2
9
20
33
6
10
9
19
37
143
Dist. of Columbia
12
8
11
8
7
0
13
11
70
Florida /r
7
4
8
0
14
0
16
13
62
Georgia
10
4
5
2
8
0
1
6
36
Hawaii
16
20
34
8
14
9
18
41
160
Iowa
13
15
18
1
13
0
14
20
94
Idaho
0
3
5
0
11
0
6
5
30
Illinois
12
1
1
1
0
0
1
1
17
Indiana
7
4
3
2
3
0
0
4
23
Kansas
7
10
9
1
13
0
16
15
71
Kentucky
11
2
4
2
6
0
3
1
29
Louisiana
10
8
5
3
9
0
13
7
55
Maine
9
1
6
0
2
0
4
2
24
Maryland
5
3
13
1
11
0
4
2
39
Massachusetts
9
1
4
0
1
0
2
2
19
Michigan
12
2
7
1
1
0
1
2
26
Minnesota
15
7
12
2
14
0
6
11
67
Mississippi
10
5
8
3
11
0
14
23
74
Missouri
8
1
2
2
11
0
0
4
28
Montana
12
0
0
0
3
0
0
4
19
Nebraska
14
8
15
3
12
0
13
11
76
Nevada
0
1
3
0
7
0
1
3
15
New Hampshire
6
1
0
2
0
0
0
2
11
New Jersey
10
2
10
0
6
0
14
13
55
New Mexico
16
20
32
8
14
9
18
39
156
New York
4
4
13
1
5
0
14
15
56
North Carolina
10
5
5
0
8
0
1
1
30
North Dakota
6
1
4
2
11
0
1
2
27
Ohio
8
12
14
5
3
0
12
14
68
Oklahoma
8
3
4
2
10
0
0
5
32
Oregon
0
0
0
0
0
0
0
0
0
Pennsylvania
9
6
16
1
1
0
14
8
55
Rhode Island
10
1
6
3
4
0
3
2
29
South Carolina
4
6
6
4
10
0
1
3
34
South Dakota
14
19
28
8
13
5
18
41
146
Tennessee
11
10
7
3
12
0
13
11
67
Texas
12
10
14
8
12
1
11
13
81
Utah
7
8
6
0
10
0
15
11
57
Vermont
6
2
5
2
11
0
2
1
29
Virginia
1
3
4
0
1
0
4
5
18
Washington /2
16
20
33
8
12
9
16
43
157
West Virginia /1
10
17
26
4
13
1
13
26
110
Wisconsin
11
11
7
3
14
0
14
14
74
Wyoming
10
6
7
3
7
0
16
13
62
 
Total
16
20
34
8
15
9
19
47
168

Source: Federation of Tax Administrators, Sales Taxation of Services, 2004./1 1996 data. /2 Includes the business license tax in Delaware and the business occupation tax in Washington. /r data revised.