Although services account for a large portion of consumer spending, they are not generally taxed by state or local governments. When sales taxes began to spread in the 1930s, the service sector was a less significant share of the economy. As it has grown, legislators have preferred to raise sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rates rather than extend sales taxes to services.
The exemption of services violates the principle of sound taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy called “neutrality.” A neutral tax system is applied to all consumption at the same rate without favoring particular products or industries. Exempting certain types of consumption is not only unfair; it also means that the sales tax rate must be higher on everything else.
There are exceptions to the service exemptions, however. While taxing services as well as goods is sound tax policy, picking only certain services to tax adds complexity to the tax code and confuses taxpayers. Some of the rules on the taxability of certain services are not only perplexing, but also humorous. Here’s an example from Connecticut, from the state’s publication “Common Sales Tax Questions Concerning New Legislation“:
Pet Boarding, Grooming and Obedience Services
Is “do-it-yourself dog washing” taxable as a pet grooming service? No, “do-it-yourself dog washing” is not taxable as a pet grooming service. …
Is dog walking taxable? A dog walking service on its own is not subject to tax. However, dog walking services provided in connection with dog boarding services are subject to tax. …
Is the clipping or polishing of pet nails subject to tax? Yes. Clipping pet nails is taxable as pet grooming services. …
Is pet bathing alone (no clipping or shearing of fur) taxable? Yes. The service of bathing pets is taxable as pet grooming services unless an integral part of professional veterinary services. …
Is energy healing for animals taxable? Energy healing for animals is not subject to sales and use taxes unless it is sold in connection with pet grooming, pet boarding or pet obedience services. …
Are charges for additional services provided while a pet is boarded (such as cuddle sessions, walks, treadmill or swim time, or supervised play time) taxable? Yes. Additional services provided in connection with pet boarding services are taxable. …
Are dog “socials” (dogs and owners socialize with other dogs and dog owners for a fee) taxable? If the social is provided in connection with boarding or pet daycare, it is taxable. …
The publication also discusses, among many other things, the tax status of Pilates classes provided in yoga studios. (There does not seem to be any mention of the taxability of yoga classes for dogs, however.)
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