Many states charge sales tax on tangible personal property, but increasingly, some states are also charging sales tax on professional services. And others don’t charge sales tax at all.
Are there all kinds of weird rules and exceptions? You bet.
Know your state laws
First, you need to know your state laws. At present, Hawaii, New Mexico, and South Dakota are the only three states to charge sales tax on legal services. Florida briefly charged sales tax but currently doesn’t.
Regardless, it’s important to stay current on your state’s requirements. As the United States increasingly becomes a service-based economy, more states are poised to consider extending their sales tax to include professional services.
And because it’s impractical for a state to try to figure out sales tax from the buyer’s end, it’s up to the seller—in this case the law firm—to know what the sales tax would be and charge it appropriately.
In response to the rise of large companies selling products on the internet, the United States Supreme Court ruled in 2018 that out-of-state sellers must still charge sales tax if they’re earning more than $100,000 in a state or conducting more than 200 transactions there.
Therefore, if you are licensed to practice law in more than one state—and one of those states taxes professional services—you must charge sales tax if you do a certain amount of business there, even if your practice isn’t based primarily in that state.
Stay tuned for changes
Charging sales tax for professional services and requiring out-of-state sellers to adhere to state sales tax policies are both fairly recent changes. Needless to say, there’s been some push-back. But the more the economy shifts from manufacturing to services, the more states are likely to jump on the bandwagon.
If your state does charge sales tax on legal services, a practice management system with integrated billing and accounting can help you keep track of the tax—which will need to be paid back to the state—and ensure that it doesn’t throw off your firm’s bookkeeping and accounting numbers.