Service businesses are always a top target for sales tax audits because of the complexities around their offerings that can lead to confusion about their tax obligations in Ohio. In this article, we discuss how Ohio sales tax applies to common services and key exemptions taxpayers should keep in mind. We also highlight some of the biggest issues that service businesses face in complying with their sales tax obligations in Ohio. Our sales tax professionals have extensive experience helping companies and their accounting teams navigate conflict and disputes with state revenue and tax departments. If you’re facing issues with an audit or assessment in Ohio, our team is here to help you resolve it.
Which Services Are Subject to Ohio Sales Tax Under the Revised Code?
Ohio Revised Code Section 5739.02 levies an excise tax on all retail sales in the state. The Tax Code further defines a “sale” to include transactions for consideration of tangible personal property and certain services, such as the following under Section 5739.01(B)(3):
- Services to repair tangible personal property that is itself subject to tax
- Services to install tangible personal property
- Services to wash, clean, wax, polish, or paint a motor vehicle
- Laundry and dry cleaning services
- Automatic data processing, computer services, or electronic information services
- Telecommunication services
- Landscaping and lawn care services
- Private investigation services
- Security services
- Information services furnished by a (900) phone call
- Building maintenance and janitorial services
- Exterminating services
- Physical fitness facility services
- Recreational and sports club services
- Satellite broadcasting services
- Personal care services (e.g., skin care, hair removal, tattooing, body piercing, etc.)
- Services to transport people within the state
- Motor vehicle towing services
- Snow removal services
- Electronic publishing services
- Fabrication labor of tangible personal property
Services that do not fall within the definition of a taxable “sale” under Ohio’s Tax Code may not be subject to tax. Additionally, many nuances and complexities could apply to Ohio’s listed taxable services that may alter their impact on your business, such as rulings from the department of tax or the Ohio Supreme Court.
Major Ohio Sales Tax Exemptions That Could Apply to Services
The biggest Ohio sales tax exemption for Ohio services businesses are transactions involving tax-exempt organizations. An example of a potentially tax-exempt organization could include nonprofits with “charitable purposes” identified under the Tax Code, such as for health or elderly care. Sales of services to churches, 501(c)(3)s, veteran organizations, animal shelters, U.S. government agencies, the State of Ohio (or its political subdivisions), and sales to other states could also be exempt from Ohio sales tax. To verify a sale of services to an exempt organization, the seller generally needs to collect a properly completed Ohio Exemption Certificate Form from the purchaser.
Are Real Property Improvements and Construction Services Exempt from Ohio Sales Tax?
Real property contractors do not generally collect Ohio sales tax from customers on their work to improve real estate. While their labor services under these construction contracts are typically exempt, contractors still have other Ohio sales and use tax obligations. For example, they are the consumer of the tangible property or services they purchase to fulfill their projects and must pay tax to the vendor or pay use tax to Ohio.
Issues That Frequently Lead to Ohio Sales Tax Problems for Service Businesses
Your service business may be at risk of an audit from the Ohio Department of Taxation because of the following issues related to the collection of sales tax. These issues routinely plague service industries for a variety of reasons, including limited tax and accounting support, a misunderstanding of the applicable rules, or ineffective invoicing and document retention methods. Consider how the following issues may or may not apply to your business and its potential Ohio sales and use tax liability:
- Purchasing materials or equipment out-of-state but using them to fulfill a service in Ohio without paying use tax
- Not collecting exemption certificates to verify uncollected sales tax from eligible customers
- Over- or under-collecting sales tax on a bundled transaction based on the characterization of the property or services provided
- Confusing nontaxable work on real property from taxable services to repair or install tangible personal property
Unresolved issues that resulted in an underpayment of Ohio sales or use tax could continue to disrupt a business through audit and assessment as well as the accrual of penalties and interest. Certain businesses and taxpayers may be able to reduce these negative impacts from an outstanding tax liability through participation in Ohio’s voluntary disclosure program or another tax settlement program that our sales tax professionals can pursue on your behalf.
Get Help with an Ohio Sales Tax Audit or Assessment Appeal
Service businesses are always a popular target for sales and use tax audits in Ohio and other states. The nature of their work often involves transactions that make them the consumer and retailer, creating a variety of potential sales and use tax outcomes. If you have concerns about an audit or assessment of Ohio sales tax related to the services you provide, consider working with our Ohio sales tax professionals today. We provide audit defense and assessment appeals to help clients mitigate their tax liability and avoid unnecessary overpayment where possible.