Updated – Originally published February 5, 2025
Many service-based businesses assume sales tax doesn’t apply to them because they aren’t selling physical products. But depending on the type of service and the state you operate in, your services may be taxable—and failing to collect sales tax can lead to penalties, interest, and compliance issues.
As states continue shifting from goods-based to service-based economies, more and more services fall under state sales tax laws. This guide breaks down how sales tax applies to services, which service categories are taxable, and how to determine your sales tax obligations as a service provider.
What Is Sales Tax on Services? The Basics Explained
Traditionally, sales tax applied only to tangible personal property (TPP)—things you can touch, like clothing, tools, or electronics. But today, many states also tax a wide range of services, including business services, repairs, recreation, and even digital offerings.
Unlike goods, sales tax on services varies significantly across states, and the rules can be confusing:
- Some states tax very few services.
- Others tax almost all services by default.
- Many fall somewhere in the middle with selective taxation.
Because of these inconsistencies, service providers often misunderstand their obligations.
Common Myths About Sales Tax on Services
- “Services are never taxed.”
False. Many states tax certain services, even if others are exempt. - “Service businesses must collect sales tax in all states.”
No. You only need to collect sales tax in states where you have nexus and your service is taxable. - “Service businesses get leniency from states.”
Incorrect. If your service is taxable and you don’t collect tax, penalties apply the same as with goods.
6 Types of Taxable Services Businesses Should Know
Although taxability varies by state, most taxable services fall into the following categories:
1. Business Services
Includes advertising, consulting, financial services, and computer services.
These services support business operations rather than consumer needs.
2. Professional Services
Provided by licensed experts such as accountants, lawyers, engineers, and medical professionals.
This category is least likely to be taxed—but there are notable state exceptions.
3. Personal Services
Services used for personal care or daily living, such as:
- Beauty treatments
- Childcare
- Pet grooming
- Educational services
4. Tangible Personal Property (TPP) Services
These services improve, repair, or modify physical items, such as:
- Equipment installation
- Automotive repair
- Tailoring and alterations
5. Real Property Services
Services performed on real estate or land:
- Construction
- Cleaning and janitorial
- Landscaping
- Pest control
6. Amusement and Recreation
States frequently tax services involving entertainment, including:
- Concerts
- Sporting events
- Amusement parks
- Live theater
Which Services Are Exempt from Sales Tax?
Professional and personal services are the categories most commonly exempt, unless a state explicitly includes them.
Example:
In Utah, haircuts, accounting services, and legal work are exempt, while sporting events and recreational services are taxed.
Because exemptions differ by state, always confirm taxability with the state’s tax authority or a sales tax advisor.
Why States Tax Some Services but Not Others
Sales tax rules for services differ because:
- States have full authority to define taxable transactions.
- There is no federal sales tax to standardize rules.
- Tax policy often shifts based on industry growth and political climate.
As service-based industries grow, some states expand their tax base to generate revenue—leading to broader taxability.
States That Tax Services (and Those That Don’t)
States With No Sales Tax
- Alaska
- Delaware
- Montana
- New Hampshire
- Oregon
States That Tax Services by Default
These states tax nearly all services unless specifically exempted:
- Hawaii
- New Mexico
- South Dakota
- West Virginia
All Other States
The remaining 41 states do not tax services by default, but many impose sales tax on specific service categories.
Rule of thumb:
- In these states, assume a service is not taxable unless the statute says it is.
Does Your Service Business Need to Collect Sales Tax?
To determine whether you must collect sales tax, evaluate two factors:
1. Do You Have Nexus in the State?
Nexus is created by either:
- Physical presence (employees, offices, contractors, or locations), or
- Economic activity (meeting revenue or transaction thresholds).
If you have nexus, you must collect sales tax if your service is taxable in that state.
2. Is Your Service Taxable in That State?
Each state defines service categories differently.
You need to review:
- State statutes
- Taxability lists
- Department of Revenue guidance
3. Are You Following Current Legislation?
Sales tax laws—especially for services—change frequently.
Don’t rely on historical rules or assumptions.
How to Calculate and Collect Sales Tax on Services
Once you determine your service is taxable and you have nexus:
- Register for a sales tax permit in the state.
- Determine the correct tax rate (state, county, city).
- Collect sales tax at the point of sale.
- Remit sales tax based on your filing schedule.
Because taxability and rates vary, many service companies partner with a sales tax professional to ensure accurate calculation and compliance.
Sales Tax Compliance Requirements for Service Companies
If you establish nexus, you must:
- Register for a sales tax license
- Collect sales tax when required
- File returns (monthly, quarterly, or annually)
- Maintain accurate transaction records
Failure to collect or remit sales tax can lead to:
- Penalties
- Interest
- Estimated assessments
- Potential audits
Point-of-sale systems and digital recordkeeping tools can reduce errors and streamline compliance.
Special Sales Tax Rules for Bundled, Out-of-State, and Digital Services
Service businesses face unique tax scenarios. Here are three common complications:
1. Bundled Transactions (Goods + Services)
Examples:
- A salon selling a haircut + styling product
- A handyman providing painting + paint supplies
In many states, if the taxable portion of a bundle exceeds 50% of the total, the entire sale is taxable.
2. Out-of-State Service Providers
You may need to collect sales tax even if you’re performing services outside your home state.
- Physical nexus is less common.
- Economic nexus may still apply if your service sales exceed thresholds.
3. Digital Services and SaaS
Taxability varies sharply by state:
- Some states treat SaaS as taxable like TPP.
- Others exempt digital services unless other services are taxed.
- Rules are evolving quickly.
Service providers should closely monitor digital tax legislation or consult a sales tax professional.
Get Professional Help with Service-Based Sales Tax Compliance
Navigating sales tax obligations as a service business can be overwhelming due to varying state rules and constant legislative changes.
The dedicated team at Peisner Johnson / The Sales Tax People specializes in helping service-based businesses determine taxability, establish nexus, register for permits, and stay fully compliant.
Contact us to learn how we can support your business.
FAQ: Sales Tax for Service Businesses
Q1. Are services taxable in all states?
No. Only some states tax services. A few states tax services by default, while others only tax specific service categories.
Q2. What services are most commonly taxed?
Repair, maintenance, personal care, amusement, and real property services are commonly taxable. Professional services are often exempt.
Q3. How do I know if my business has sales tax nexus?
You have nexus if your business has a physical presence or exceeds a state’s economic threshold.
Q4. Do digital services and SaaS require sales tax?
It depends. Some states treat digital services like tangible goods and tax them; others do not.
Q5. How can I stay compliant with varying service tax laws?
Monitor legislation, maintain accurate records, use sales tax automation tools, or work with a sales tax consulting partner.
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