When I generated my first invoice, my accounting software (Zoho Books) prompted me to collect sales tax. Honestly, I hadn’t thought of it until just then!
That prompted me to dive into a lot of research. I want to share the story because all small business owners have to grapple with this issue, but here’s the big disclaimer. I am not a tax professional. Nothing I write here should be construed as tax advice. I am merely sharing my experience in case it helps you.
Government Jurisdiction
In the United States, sales taxes are determined by state and local governments. There isn’t a federal sales tax, at least not yet. I live in Golden, Colorado, which is in Jefferson County, so that’s where my research started.
State of Colorado
In Colorado, sales taxes are managed by the Department of Revenue, Division of Taxation. The DOR provides a help information page as well as a guidance document. As in many states, services are not subject to sales tax in Colorado. Here’s the relevant excerpt from the Colorado Sales Tax Guide.
Anyone engaged in the business of rendering services to customers is generally considered the consumer, and not the retailer, of any tangible personal property that they use incidentally in rendering the service. Consequently, service enterprises are generally required to pay sales tax when they acquire such tangible personal property and are not required to collect sales tax from their customers. If, in addition to rendering services, the service enterprise regularly sells tangible personal property to consumers, then the service enterprise is a retailer with respect to such sales and must comply with the licensing, collection, and filing requirements applicable to retailers.
Colorado Department of Revenue, ยง39-26-102(15)(a)(I) C.R.S.
My interpretation – again, I’m not a tax professional – is that most of my laser engraving is not subject to sales tax. I’m providing a laser engraving service rather than a tangible product. For example, in a job I did for Cook St. Roll-Offs & Recycling, I laser engraved a logo on some water bottles. The water bottles are a tangible product, but they were purchased by the client and a sales tax was paid at the time of purchase. If I were to collect sales tax on my laser engraving service, the client would in effect be taxed twice. That’s not right!
Jefferson County
The State of Colorado collects sales taxes for counties in the state, so I think that means the exemptions are the same between Colorado and its counties. I couldn’t find this explicitly stated, but it makes sense.
City of Golden
The city of Golden also does not require a sales tax on services. However, that is about the extent of the information available on the city’s website. There is a bullet list of exemptions and one of them says, “Professional services, such as accounting and legal.” A definition of “professional services” is not provided, so I decided it includes laser engraving.
Sales Tax for Tangible Products
Moto Woodworks does more than laser engraving, so I will have to collect sales tax on anything considered a tangible product. For example, if I take on a job to build some chairs, I would collect sales tax as shown in the image below.
You could make the argument that I provided a woodworking service that is tax exempt. After all, I already paid a sales tax on the materials used in the chair – wood, screws, glue, etc. But I think that’s a stretch. The construction materials were substantially re-shaped into the form of a chair, making it a tangible product that is subject to a sales tax. That’s where this example differs greatly from the laser-engraved water bottles I mentioned earlier. In that example, I didn’t do anything to the water bottles other than laser engrave a logo.
Granted, “substantially re-shaped” is a subjective phrase. I don’t know if that’s where someone from the Department of Revenue would draw the line. It’s just where I am drawing the line.
Finally, a note about use taxes. In the table above, the taxes for RTD and CD are use taxes. Colorado treats sales and use taxes the same, so the application is to tangible products and not services. I used a mapping tool to determine that my address is located in a district where these use taxes apply.
