The plot thickens: Minnesota’s taxable and nontaxable detective services

If you hire a detective to conduct surveillance, locate a missing person, or trail a spouse suspected of infidelity, are those services subject to sales tax? It depends on the state and the precise nature of the sale.

In Minnesota, for example, detective, security, burglar, fire alarm, and armored car services are generally subject to sales tax. However, not all detective, security, burglar, fire alarm, or armored car services are taxable: Taxability sometimes hinges on who’s providing the service or where it’s provided. And taxability rules can change.

In fact, they have. The Minnesota Department of Revenue didn’t include identity theft protection and monitoring as a taxable security service in 2003, the last time it published guidance on the subject. Yet in recently published Revenue Notice #19-04 (which revokes and replaces the 2003 notice), the department adds identity theft protection and monitoring to the list of taxable security services.

There’s another notable change. Back in 2003, detective and security services couldn’t be provided by unlicensed providers. Revenue Notice #19-04 removes that licensing requirement.

The notice also provides an extensive list of taxable and exempt detective and security services. 

There are more than a dozen taxable detective or security services. Taxable detective services include:

• Investigating crimes, wrongdoings, or threats against the federal, state, or local government
• Investigating the character, conduct, habits, identity, etc. of any person or organization
• Investigating the location or recovery of lost or stolen property
• Taxable security services include:
• Protecting persons or property
• Preventing theft of goods, merchandise, or money
• Providing identity theft protection and monitoring 

Some detective services are exempt. These include charges for:

• An employee to investigate a pending or potential claim against an employer
• An auditor, accountant, or accounting clerk to conduct audits or accounting functions
• An attorney investigating legal matters for an attorney or law firm

Some services are taxable if performed as part of a taxable detective or security service but exempt if provided on its own. These include charges for:

• Collecting payment for a debt
• Damage appraisals
• Expert witness services
• Fingerprinting
• Repossession services

Some normally taxable detective and security services are exempt when performed or provided by a specific person or organization. For example, detective and security services are exempt when performed or provided by:

• An employee for an employer
• A nonprofit organization or any organization at the direction of a county for monitoring and electronic surveillance of persons placed on in-home detention
• A partnership or association for another partnership or association if one of the entities owns or controls more than 80 percent of the voting power of the equity interest in the other entity
• Members of an affiliated group of corporations eligible to file a consolidated tax return
• Off-duty licensed peace officers within the jurisdiction they serve

For a more complete list of taxable and exempt detective and security services in Minnesota, see Revenue Notice #19-04.

Minnesota sales and use tax applies to several other services in the North Star State. These include:

• Athletic or sports club membership (one-time initiation fees and ongoing membership dues)
• Building and residential cleaning, maintenance, and disinfecting services and pest control and exterminating services
• Delivery of aggregate materials by a third party (with exceptions)
• Laundry and dry cleaning
• Lawn care, garden planting and maintenance, indoor plant care, and stump removal (with exceptions)
• Massages (with exceptions) and spa services
• Motor vehicle washing, waxing, and cleaning (including services provided by coin-operated facilities)
• Pet boarding and grooming (with exceptions)
• Rustproofing, undercoating, or towing motor vehicles
• Parking (nonresidential)

Out-of-state retailers must register with the Department of Revenue and collect and remit Minnesota sales tax if they have more than $100,000 in retail sales or at least 200 separate retail sales transactions in the state in the prior 12-month period.

When calculating that threshold, businesses should include sales of taxable items, nontaxable items, taxable services, and sales to exempt entities. However, sales of nontaxable services and sales for resale should not be included in the threshold count. More details are available in this state-by-state guide to economic nexus.

Determining which services are taxable where takes time, as does staying on top of product taxability changes. Automating sales tax calculation can help.