Anyone who produces or resells a product is responsible for collecting sales tax from their clients and/or customers. This includes interior designers who source everything from raw materials for flooring and cabinetry (although your builder is probably ordering these) to finished products like light fixtures and furniture. Each of our readers has likely collected and paid sales tax related to these products and materials. However — as many interior designers will know — it isn’t just the sale of tangible personal property that requires you to collect sales tax. They must also collect on what the government calls “taxable services.” Determining which interior design services are taxable and which are tax-exempt can be incredibly difficult. After all, each state has a different approach to taxing services. Local taxes also differ. The only way to ensure complete compliance is to consult an expert in your state. If different from the state in which your own business is registered, you should consult with an expert in your client’s state. In this post, we answer a few frequently asked questions about sales tax on interior design services. We cannot provide absolute clarity. Still, we hope this post helps you create an informed list of questions to ask when discussing your tax burden with a local expert.
Answering Your FAQs About Paying Sales Tax on Interior Design Services
The interior design industry is incredibly complex. Unfortunately, the remittance rules surrounding sales, use and excise tax are complicated too. With an amazing business coach interior design on hand, we will do our best to answer all your frequently asked questions about paying sales tax below.
Of course, business coaches can’t answer every single tax-related question owners of interior design businesses might have. After all, we’re designers — not accountants! Even the best small business coaching program can only go so far. If you need additional help after reading our post, we encourage small business owners to contact the appropriate government office or consult a local expert.
Should I Collect Sales Tax on Resold Items?
Interior designers rarely pay sales tax on items purchased wholesale. We collect sales tax after successfully selling the items we’ve selected and purchased wholesale to our clients.
To do this, most businesses in the design or interior decorating industries must obtain a resale license or resale certificate. Some states outright require a resale certificates, while others do not. A resale certificate shows tax collectors that you are not responsible for paying sales tax when shopping wholesale. Highly recommend that you obtain a resale certificate for your firm if you don’t have one already!
To obtain a resale certificate, an interior designer will need to apply through the appropriate tax agency in their state. After providing basic information about their business, that department will decide whether to issue the license. If issued, the designer must present their certificate to the wholesaler from whom they wish to purchase finished products or raw materials.
While you are not responsible for paying sales tax upon purchase, you are responsible for collecting sales tax from your client. After all, most tax agencies consider your client the end user of those products. The small business owner who sold those products is not the end user.
When Is a Service Taxable?
As noted above, clients must pay sales tax on certain services. Interior designers and interior decorators are required by law to collect these taxes and pass them on to the government. The state in which your business operates and that of your client’s site determines the sales tax rate and when paying taxes is necessary.
For example, this resource from the Texas Comptroller notes that “Texas imposes a 6.25 percent state sales and use tax on all retail sales.” It also imposes this tax on all “leases and rentals of most goods, as well as taxable services.”
In Texas, taxable services include data processing services, nonresidential remodeling services and “labor that results in the sale of a taxable item.” The latter applies to artists, caterers, photographers and other creative business owners.
Each State Taxes Interior Design and Other Creative Services Differently
Some states have very loose laws surrounding which services can be taxed. Others — like California — narrowly and explicitly define who should pay sales tax and when. As this resource from Cal CPA explains, California typically restricts sales tax collection to two categories of services. These include services integral to the “sale of property” and services that contribute to “the creation of a new item.”
The first means that if you must perform a certain service in order to complete the sale, that service would probably be taxable. The second means that if your service allows the client to use a new product, sales tax applies to that service. If it allows the client to repurpose or repair an existing product, the service might not be taxable.
The Cal CPA resource points to tailoring as an example. It notes that alteration of a new garment would require the tailor to collect sales tax on the service and materials. The alteration of an already worn garment would not be subject to sales tax. Materials used by the tailor would still be considered taxable items.
Do State and Local Governments Collect Sales Tax on Interior Design, Residential Design or Remodeling Services?
One question that constantly pops up is whether design fees and remodeling services are taxable. In some states, design services are only subject to sales tax when a client purchases products or materials as a result of those services. If no taxable item is purchased, the client might not need to pay sales tax on the design fee.
How you structure fees for your services impacts whether you will need to collect sales tax in most states. According to this Foyr resource, your design fee should incur sales tax if “based on a markup of goods” installed in the client’s home.
Understanding the Difference Between Taxable and Tax-Exempt Design Services
There are certain circumstances under which a client buys materials or products at the designer’s behest but does not pay tax on the service. For example, remodeling, restoration and/or repair services that contribute to the health and safety of a home are rarely subject to sales tax.
This resource from New York State-based law firm Pullano & Farrow explains. According to Pullano & Farrow, “the service of installing items that do not become part of the real property” is indeed taxable. However, if an item installed by a repairman or remodeler “becomes part of the real property, that item shall be considered a capital improvement.”
Services that result in capital improvements are typically exempt from sales tax. Again, this differs state to state, so be sure to check with local authorities before assuming such exemptions apply to your project.
To avoid incurring a penalty for not paying sales tax, be sure to record services resulting in capital improvements as separate line items. Submit all necessary forms to the appropriate government office on behalf of your small business.
Are Lump Sum Contracts Subject to Sales Tax?
Some clients react negatively to sales tax charges — especially those related to design fees — because they can appear extraneous and inappropriate. To avoid incurring sales tax and shocking clients, certain designers charge a lump sum instead of itemizing services and goods sold. While this might sound like an effective work-around, many interior designers question whether it’s actually legal.
According to Fred Nicolaus in his article “Getting sales tax right is boring. Getting it wrong can be a disaster” for Business of Home, the answer is yes. If your client accepts the lump sum contract, you can avoid paying sales tax in certain states. To slash their tax bill, some designers opt to increase their design fee instead of charging a mark-up on individual items. Of course, this strategy only has a chance in states that do not require designers to pay sales tax on interior design fees.
Fluffing up your design fee while pretending that you haven’t charged a mark-up on materials or products is not strictly legal. According to Nicolaus, “adding money to your nontaxable design fee that’s explicitly related to the purchase of a sofa [is] likely breaking the law.”
Should You Collect Taxes Based on Your Tax Rate or Your Client’s Tax Rate?
Unfortunately, the answer to this question differs from state to state. Figuring out which services are taxable is complicated enough when your small business operates in the same state as the client site. When the project site is in another state, determining which services are subject to tax is even harder.
Some states charge a split tax, where a portion of the sales tax collected is based on rates where the business is registered. Another portion is based on tax rates in the client’s state, county or city. Other states are solely “origin-based” or “destination-based.” Check with your accountant and the appropriate government agencies — in your area and your client’s — to ensure compliance.
What Are the Consequences of Failing to Pay Sales and Use Tax?
Following an audit, the severity of penalties for failing to pay sales/use tax will depend on whether you broke the law on purpose. Regardless of the severity of this penalty, failing to remit sales tax could threaten your business success and take you off the path to achieving your business goals.
In some cases, it could thwart any business growth by tying up your capital in fees owed to the government. Sales tax evasion can result in both civil and criminal penalties — including recovery fees, interest charges and even jail time. The latter is quite rare and typically occurs only if you willfully evaded collecting and paying your taxes.
Final Thoughts on Use and Sales Tax Liability as an Interior Designer
Keep in mind that every state’s laws surrounding sales and use tax are different. These laws change frequently and can be difficult to follow without professional help. Some states provide exhaustive instructions for designers and other professionals in industries that have trouble navigating sales tax laws.
Others provide little to no information for business owners in sales-meets-services industries. Even this resource from the U.S. Small Business Administration on how to pay taxes as a small business owner lacks information about sales tax remittance rules. Knowing the vocabulary each state uses when crafting these laws is vital as different rules apply depending on state-specific classifications.
To protect yourself and your business from a shocking tax bill, document everything. Track your time, purchases and sales as accurately as possible. Interior designers should consult with a tax professional and reach out to the appropriate officials in your tax jurisdiction if needed.
Most states have a Department of Tax and Fee Administration you can contact for up-to-date information about local and state sales taxes. Jennifer Dunn’s TaxJar article “How to Talk to a Human about Sales Tax in Every State” is one resource for designers seeking expert advice.
Our collective has studios in Houston, Texas and Aspen, Colorado. We would call 800-252-5555 and 303-238-7378 respectively. If you still have questions about sales tax on design services or need additional resources, drop a comment below.
Worried About Your Tax Bill?
As we draw nearer to the end of the fiscal year, many creative business owners have taxes on their minds. With October coming to a close, some of us just paid our 2021 tax bills and aren’t ready for next April.
You might not be able to reduce the amount you owe in sales tax. However, there are other ways to lower this year’s tax burden. Our recent post details over twenty-five different credits and deductions that might apply to your small or mid-sized design business.
Reach Out to Laura and Other Interior Design Business Owners for Guidance and Great Ideas
As many of our readers already know, we host small business workshops designed for creative entrepreneurs every few months. These workshops aim to help entrepreneurs scale by figuring out exactly what they want for the future of their interior design firm and how to get there.
Together, we work on setting SMART goals, writing an interior design business plan, and so much more. Over the last year, we have hosted marketing strategy, vision building and hiring workshops, but we are always looking for new topics to delve into. Let us know in the comments below if you would like to discuss sales tax remittance rules in further detail during a Design Dash small business workshop.
In addition to workshops, we offer group sessions and one on one small business coaching services. Join interior designer and business coach Laura Umansky as we address the biggest challenges facing interior design business owners on our blog, in our workshops and on social media.
For more small business coaching from Laura and advice from other interior designers in our community, join the Design Dash private Facebook group here. You can also answer questions from other small business owners, helping us grow a community of informed and successful designers!
Whether you own an interior design startup or an established firm, we would love to hear from you. Let’s work together to ensure your successful interior design business thrives like never before in 2023.