One of the advantages some franchise business opportunities tout is “No sales tax!” This typically shows up right along with home-based, no or few employees, no inventory, and low overhead as an advantage for service-oriented businesses like gyms, salons, and business-to-business professional services.
This is based on the traditional distinction between goods and services. Goods are physical objects that are given to a customer by a business in exchange for payment. Services are performed without giving physical objects to customers. Simple, right?
Not any more. There are two big reasons for this. First, the distinction between goods and services is less clear. If you buy a DVD or a CD in a store, you pay sales tax on your purchase and put that physical object in a bag. But if you stream the same content on your computer, you are arguably getting the same thing as if you bought the object, but no tangible objects are involved. Some tax jurisdictions want to see these two situations treated in the same way.
Add the pictures you take on your cell phone instead of buying film and paying for prints of the photos, the electronic gift cards you send instead of buying physical presents, and the newspapers, books, and magazines you used to buy before you started reading them on your iPad or Kindle. That’s a lot of revenue moving out of the physical space.
The second big reason is that we’re moving from a goods-based economy to a service-based economy. If you don’t send an electronic gift card for downloading music, you might instead give a mani-pedi, a boot camp membership, or a subscription to a maid service. People spend more of their money on services, and more businesses provide services rather than making or selling goods.
The result is that states and cities no longer get the kind of revenue from sales tax that they used to. They can’t just cut back on expenses, and often they can’t raise rates without getting approval from taxpayers, who are notoriously unsupportive of sales tax increases. The solution? Extend taxes to services as well as to goods.
Many states are extending sales taxes to services. They’re not usually just doing this as a blanket change, though. That’s what makes it difficult to determine whether you’ll have to deal with sales tax or not.
For example, if you have a gym in Florida, you’ll have to collect sales tax — but the gym down the street which is owned by a hospital won’t collect sales tax, even though they’re open to the public and offer the same services you do. In Texas and California, you’ll collect sales tax, but in Missouri you won’t. Washington, D.C. is still debating whether or not to collect sales tax on gym memberships, but they’ve added sales tax for a wide range of other services already.
As states and cities work to increase falling sales revenues, they’ll be more likely to add in services, so you should probably assume that any franchise business, even if it currently doesn’t pay sales tax in your town, might do so in the future. Bottom line: don’t let “No sales tax!” sway you when you decide which franchise to choose.