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Are On-Demand Services Responsible for Sales Tax?

  • Learn
  • August 22, 2015 | Avalara

You know what’s so hot right now? On-demand services, aka convenience services, aka apps and websites connecting people to local vendors.

Don’t want to put your Ikea furniture together? Ran out of vodka during a party? Have a craving for food from two different restaurants? Can’t find a lawn guy?

No worries, there’s an app for that! An app or website will scour its partnerships until it finds a local provider who can get you what you want.

Who Is Responsible?

Every business is responsible for knowing the tax burden of their specific service in their particular state where they have nexus. And because tax law can change every year, that is already quite a task. But on-demand apps might connect people with multiple niche services in many different states. That’s pretty tricky.

If the app is collecting payment--which it almost always is--then tax calculation and collection falls on the on-demand service.

“Some startups try to break rules or avoid dealing with tricky legal or accounting stuff, but we talked to people early on about how we wanted to approach sales tax,” said Mike Fingado, CEO of Mowdo, which connects users with lawn servicers. “Our rollout is largely based on data showing where the demand is, but favorable tax implications are a consideration as we scale.”

Taxes Can Be A Dealbreaker

Keeping a low price point is a huge selling point in almost any industry, so all other factors being equal, varying tax laws in different states could be the factor that directs growth.

In fact, when Mowdo was getting off the ground, at the very beginning they avoided rolling out in states with sales tax implications for them, but recently expanded into taxed states, adding a line item in the checkout process.

“We partner with local lawn services, and we charge sales tax to our customer if they are in a state where lawn services are taxed," said Fingado. "About half the states currently require sales tax for our particular service, which is lawn care maintenance.”

The laws are widely variable. For example, in Nebraska, lawn mowing services are not taxable. Alternately, in Washington state, mowing the lawn is taxable but landscape design is not taxable.

No Shortcuts

There aren’t any shortcuts for on-demand businesses dealing with sales tax. The on-demand business can’t just ask the local vendor what the tax rules are--relying on vendors who may not always be correctly informed is a shaky business model.

"We’ve noticed a lot of irregularity in the invoicing of traditional lawn care providers,” said Fingado. “It is a bit concerning that there are lawn services that will charge their clients sales tax even if their state doesn't actually tax these type of services. The tax code for lawn care services is complicated, so I like to think they are just playing it safe or perhaps uninformed.”

Mowdo individually determines what taxes need to be collected from each user, then passes that money to the local vendor to remit to the government.

Guess who can help make that tax handling a lot easier? Well, Mowdo’s payment provider, Stripe, recommends working with Avalara to calculate complicated tax for marketplaces and services, due to the complex nature of working across state lines.

Aw, shucks, Stripe. Thanks!

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