Service Providers' Sales Tax on Purchases

April 13, 2006

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The following questions frequently arise in regard to sales tax on purchases by service providers:

Is there any way I can put off payment of sales tax on supplies and materials until after I finish a job? This issue of taxability on the purchase of supplies and materials is common to both the service industry and the construction industry. In most states, purchases of supplies and materials made by service businesses are generally taxable at the time of purchase because most states treat these businesses as the end consumers. As end consumers, you are not expected to resell the supplies and materials, but rather use them for your own business consumption.

Some states, however, may allow you to treat materials and supplies as a purchase of resale inventory if, when you bill your own customers, parts and supplies provided with the service are separately stated and billed on the invoice.

Your interior painting business is hired by a customer to paint all the rooms in a house for $2,000. Included in the price for this service are twelve cans of paint, for which you paid $240. If the invoice you send your customer includes only a single line item charge of $2,000, then you'll probably have to pay sales tax on the paint when you buy it.

However, if your state allows you to defer collection of sales taxes by separately billing labor, parts and materials, then you might want to itemize the bill to include separate charges for both labor ($1,760) and paint used ($240). This is generally a useful strategy, especially if you don't expect your customer to pay you soon after the paint is purchased.

Will I have to pay sales tax on purchases of equipment that is entitled to a manufacturing exemption? If you purchase equipment that is going to be used in your business, check with your state to see if you qualify for a manufacturing exemption. A number of states offer a manufacturing exemption if the equipment will be used to produce or manufacture goods or products for resale.

As the owner of an interior painting business, you purchase your own paint mixing machine so you can save money on paint by purchasing it unmixed at wholesale. If you can show that the mixing of different types of paint is a process that changes the original materials (unmixed paint) used in the process then, depending on the state you're in, you may be able to qualify for the manufacturing exemption.

To illustrate, in states like New York, the tax assessor may give you a manufacturing exemption if you can show that the mixing machine changed the color or texture of the unmixed paint you originally bought.

If you're in a state like Illinois, though, you'll get a manufacturing exemption only if you can prove that the mixer substantially changed the unmixed paint. This means that you probably won't get the exemption because even if the paint is a different color it's still pretty much in the same form and is still going to be used for the purpose of covering walls. Accordingly, if you're thinking of taking this exemption, we recommend that you check with your individual state to see what the requirements are for claiming a manufacturing exemption.