Although there are no easy answers to tax questions, a buyer can help determine whether the language services being purchased are taxable or not* by answering three simple questions – What? Where? and Why?
1. What am I buying?
- Some services, such as translation (involving only word processing) and interpreting, are not taxable while others, such as graphic production, audio-video production, and equipment rental, are taxable.
- When taxable and non-taxable services are combined, the key issue is whether the services are itemized on the invoice. Let’s consider for instance the production of a Chinese brochure. If the invoice itemizes each service, namely translation and production, then the sales tax is only applied to production. Translation remains non-taxable. However, if the service is invoiced as a lump sum, the whole amount is taxable.
- Some customers prefer to pay the sales tax directly to the state (remember that sales tax is imposed on the end consumer of the service; the seller is merely required to withhold for the state). In this case, the customer should provide a Direct Payment Exemption Certificate to the seller.
2. Where is the end product being shipped?
A taxable service delivered outside of Texas generally is not subject to sales tax, and the seller does not have to charge this amount. Note: Do not confuse sales tax with use tax, as the customer may still have to pay a use tax in his/her state.
3. Why am I buying the service?
If the buyer is not the end user of a taxable service, but instead intends to resell it either as part of its own services or as a broker, he/she may provide the seller with a Sales and Use Tax Resale Certificate instead of paying the tax. Note: If a service is taxable and the tax is not collected, the seller is ultimately responsible for the tax.
If you are unsure about the taxable status of the service you are purchasing, ask the seller to clarify.
*Disclaimer: This summary addresses the application of the sales and use tax for services under Texas law; however, its principles may apply to other U.S. states that impose sales and use taxes. This summary is not tax advice and should not be relied upon. Please consult with a licensed tax professional.