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Determining the sales tax treatment of shipping and handling can be complicated. The short answer is: the rules vary by state.

As an ecommerce seller in the US, you likely already collect sales tax from your customers for the products and services you sell. But you may question: What about shipping? Do you need to charge sales tax on shipping as well?

It’s crucial to learn how sales tax on shipping works to stay compliant in states where you have nexus. This guide will help you navigate the complex system of sales tax on shipping.

Shipping vs Handling: What’s The Difference?

Both activities involve managing taxable goods for delivery to consumers. However, there are clear distinctions between them.

Shipping involves explicit tasks, such as:

• Packaging items 
• Transporting goods
• Creating shipping labels
• Selecting the shipping carrier
• Tracking shipments and updating the status

Handling services, on the other hand, include activities like: 

• Inspecting products 
• Securing package safety
• Sorting and organizing goods
• Coordinating with shipping carriers 
• Assembling and labeling packages

When it comes to the taxability of these services, the rules vary by state. In some states, shipping is taxable. Meanwhile, other states may exempt such services from sales tax.

On the contrary, handling services also follow varying state sales tax rules, and their taxability often depends on whether the seller lists them separately on the invoice or bundles them with the product cost.

The complexity of these rules can easily confuse businesses about what is and isn’t taxable. To stay compliant, learning the fundamental rules in every state is crucial. Read on through this guide to discover everything you need to know about sales tax on shipping.

Factors That Determine Shipping Taxability 

There are important factors that determine the taxability of shipping services. In general, there are 3 main aspects to consider, those are: 

1. Destination: The buyer’s location determines the applicable tax rules.  
2. Product Taxability: If the product is tax-exempt, shipping may be exempt as well.
3. Mode of Transportation: Tax rules may differ depending on whether the seller or a third-party carrier delivers the goods.
4. Retail Delivery Fees (RDF): A flat fee applied to every delivery that contains at least one taxable item.

Understanding the intricacies of shipping taxabilities can be difficult at first. Thus, here’s a more in-depth explanation to fully grasp the differences between these essential factors.

1. Destination

Most states determine sales tax based on the buyer’s location. A few states use origin-based rules based on the seller’s location.

However, remote interstate sales always follow destination-based rules.

Example: 

• You sell from Colorado, where shipping is generally not taxable.
• Your customer is in Arkansas, where shipping is typically subject to tax.
• Because the destination is Arkansas, the shipping charge is taxable.

Another example:

• You sell from Arkansas, where shipping is usually taxable.
• Your customer is in Colorado, where shipping can be exempt under certain conditions.
• In this case, the shipping charge may be exempt if you meet Colorado’s requirements.

These examples show that the destination state’s rules determine whether shipping is taxable.

However, note that shipping taxability still depends on the destination state’s specific delivery rules, not just the destination.

Additional Restrictions

Specific conditions must be met for the sales tax exemption to take effect. This is crucial for cases where the destination influences the sales tax on shipping.

For example, in Colorado.

• Shipping must be listed separately from the product price, and
• The charge must be separable from the purchase, meaning the customer could choose another delivery option, such as pickup.

To stay compliant with each state’s unique regulations, refer to our state-by-state table in the lower section as your guide.

2. Product Taxability

Just like the destination factor, product taxability can also complicate the sales tax on shipping. For a straightforward explanation, here’s another scenario:

• You are a vendor from Arkansas, where shipping is generally subject to tax. 
• Your customer is also from Arkansas, but the purchased goods are exempt from the state’s sales tax. (Examples of tax-exempt goods in Arkansas are agricultural supplies, medical devices, feminine hygiene products, and more.)
• Although shipping is generally taxable in Arkansas, the purchased goods are exempt from sales tax in this case. Therefore, the whole transaction (including shipping services) is excluded from sales tax.

In simpler terms, the product’s taxability may override the “destination” factor in determining sales tax on shipping services.

Each state has different rules regarding the taxation of specific products. If you’d like to know your state’s taxable and tax-exempt products, you can check our state-dedicated ultimate guides.

3. Mode of Transportation

The method used to transport goods is another important factor in determining shipping taxability.

Generally, this involves two main scenarios:

• when the seller delivers the goods using their own vehicle or personnel, and
• When the seller uses a third-party common carrier.

It’s critical to remember that regardless of the mode of transportation, sales tax nexus is the foundational element determining if a seller is required to collect any sales tax (including on shipping) in a particular state.

Here are various circumstances you might encounter:

Scenario 1: Seller Delivers Goods (Using Own Vehicle/Personnel)

If you are a vendor who delivers taxable goods using your own vehicle or personnel to a customer in a state where you have a sales tax nexus:

• In many states, charges for delivery made by the seller’s own vehicles or employees are considered part of the overall sale of the taxable goods and are therefore typically subject to sales tax, even if separately stated. The logic is often that delivery is an integral part of making the sale.
• If you do not have a sales tax nexus in your customer’s state, you are generally not required to collect sales tax on the transaction, including any delivery charges, regardless of who performs the delivery. In such cases, the customer may be responsible for paying use tax directly to their state.

Scenario 2: Third-Party Common Carrier Delivers Goods (e.g., UPS, FedEx, USPS)

If you hire a third-party common carrier (like UPS, FedEx, or USPS) to deliver your taxable goods to a customer, and you, the retailer, have a sales tax nexus in the customer’s state:

The taxability of third-party carrier shipping charges varies significantly by state.

• If shipping charges are stated separately, many states may exempt the common carrier’s shipping charges from sales tax.
• If the delivered goods are taxable, shipping charges may still be subject to sales tax in other states, even if stated separately. As long as the delivered goods are not exempt from sales tax, then sales tax may still apply to shipping charges.
• If shipping charges are combined with handling fees, the combined charge is often subject to sales tax. This applies even in states where separately stated shipping charges might be exempt. That’s because handling fees are typically subject to sales tax in most states.
• If you have a nexus in your customer’s state, regardless of your carrier’s nexus, you, the retailer, are still the one responsible for collecting sales tax from your customers. Your obligation to collect sales tax on the shipping charges (if taxable in that state) arises from your nexus with the state and the state’s rules regarding shipping.

Scenario 3: Resale Certificates and Shipping (Typically in Drop-Shipping)

A purchaser (often a retailer) uses resale certificates to buy goods for resale from a supplier without paying sales tax on that wholesale purchase. This is common in drop-shipping arrangements.

Example: You run an online store but don’t keep inventory on hand. Instead, you buy products from a third-party supplier who ships them directly to your customer.

• Your transaction with your supplier: As the retailer, you give your supplier a valid resale certificate. Because of this, the supplier usually does not charge sales tax on the product or the shipping cost for that order.
• Your transaction with your customer: If you have sales tax nexus in your customer’s state and the product is taxable, you must collect sales tax on the sale. Depending on the state’s rules, the tax may also apply to the shipping fee you charge your customer.
  The resale certificate only applies to your purchase from the supplier, not to the final customer sale.
  • NOTE:
    • If neither the retailer nor the supplier has nexus in the delivery state, the state generally does not require sales tax, and it typically does not tax shipping.
    • If the retailer has no nexus but the supplier does, the supplier may be responsible for collecting and remitting the sales tax.
    • The rules of the state where you deliver the goods ultimately determine the final obligation.

Retail Delivery Fees (RDF)

Why are RDFs Different from Sales Tax

• Non-Refundable: Even if a customer returns the product and you refund the sales tax, the Retail Delivery Fee is typically non-refundable because the delivery service has already occurred.
• Flat Rate: It doesn’t matter if the order is $100 or $10,000; the fee remains the same per transaction.
• Mandatory Line Item: Most states require this to be listed as a distinct line item on the invoice (e.g., “Road Improvement and Food Delivery Fee”).

When is Sales Tax Applicable on Shipping? 

The previous sections discussed the main factors that influence the taxability of shipping services. Additionally, there are other situations to be aware of to determine when sales tax applies to shipping services.

To stay tax-compliant, here are some general guidelines to keep in mind:

• Taxable Items: Shipping is usually taxable when the goods being shipped are taxable. Always calculate the applicable sales tax in your transactions.
• Non-Taxable Items: Shipping is typically exempt when it applies only to tax-exempt items. Ship these items separately or clearly separate them from taxable goods.
• Combined Shipments: When taxable and exempt items ship together, shipping tax is often applied only to the taxable portion. Some states, however, tax the entire shipping fee.
• Separate Shipping Charges: In some states, shipping is not taxable if the seller lists it separately from the item price or allows the buyer to arrange their own pickup or delivery.
• Freight and Handling: Shipping (freight) may be exempt in some states, but handling fees are often taxable.
• Location of the Sale: Tax rules depend on whether the state uses origin-based or destination-based sourcing.
  For remote interstate sales, the destination-based rule always applies. For origin-based sales, shipping tax depends on the seller’s location and that state’s rules.

These guidelines provide a starting point, but digging deeper into the specific sales tax regulations of the states where you operate is essential to ensure accurate compliance.

State’s Guide on Sales Tax on Shipping

Here is our comprehensive guide, with a state-by-state breakdown of key details on sales tax for shipping.

Pro-Tips for 2026 Compliance

1. Avoid the “Bundle” Trap: Never list a single line item for “Shipping & Handling” in states like California or Illinois. Handling is almost universally taxable; bundling it with shipping can make the entire amount taxable by association.
2. The FBA Reality: If you sell via Amazon FBA, assume shipping is taxable in Florida and Illinois. Because there is no “pickup” option available for the end-user, these states view the shipping charge as mandatory and part of the taxable sale.
3. Audit-Proof Mixed Boxes: If you ship a taxable item (electronics) and an exempt item (groceries) together, you must allocate the shipping cost between them.
   1. Calculation: Use the weight of the taxable items vs. the total weight to determine exactly how much shipping tax to charge. Keep this calculation on file.

Out-of-State Sales: Is Shipping Subject to Sales Tax?

Being an out-of-state seller makes identifying sales tax obligations more challenging. As previously mentioned, there’s a state-mandated law regulating the taxation of sales by businesses with sufficient economic presence. That rule is “nexus.”

Sales tax nexus is the main factor in determining whether your business is subject to sales tax obligations. When your business triggers a nexus, you must also collect sales tax on shipping charges. This rule applies whether you’re an in-state or an out-of-state company.

However, to be specific, out-of-state sellers can establish an economic nexus when selling taxable goods in another state.

The criteria for creating an economic nexus vary per state. Despite that, you only need to take note of the following factors:

• In most states, the standard threshold is $100,000 in sales within the state.
• Many states have eliminated the 200-transaction threshold requirement, leaving only the sales threshold as their primary criterion.
  For example, Illinois officially eliminated the 200-transaction count. Remote sellers now only trigger nexus if they exceed $100,000 in gross receipts. In addition, states like North Carolina, Indiana, and Wyoming have also removed this threshold as of 2025-2026
• Always check the specific requirements for each state, as thresholds can vary. For example, some states, like California, have higher sales thresholds, such as $500,000.

Once your business meets these thresholds, it becomes responsible for collecting and remitting sales tax in the state. This establishes that shipping is also taxable for out-of-state sales when your business has nexus and the state’s rules make shipping taxable for the given transaction.

But as previously discussed, the taxability of shipping varies depending on multiple factors. Simplify your experience by letting sales tax experts at TaxHero identify and manage your sales tax obligations! 

Should you charge sales tax on your shipping fee?

Charging sales tax on shipping fees can be situational. In that case, here are common cases you might encounter and the relevant options you can consider:

• Separately Charged Shipping: Some states exempt shipping from sales tax when sellers list it separately from the product price.
• Itemized Shipping on Invoices: Clearly separating shipping from the cost of taxable goods may allow an exemption in some states. However, others still tax shipping even when itemized.
• Handling Fees: Handling charges are often taxable, while shipping may or may not be taxable depending on the state.
• Free Shipping Promotions: If sellers include shipping costs in the product price, sales tax may apply because authorities calculate tax on the total price.
• International Sales: U.S. sales tax usually does not apply to goods shipped outside the United States. However, the buyer may still be required to pay import duties and international taxes, such as Value Added Tax (VAT) or Goods and Services Tax (GST), in the destination country.

Frequently Asked Questions

Understanding the grocery tax by state is essential if you sell groceries, snacks, or beverages online. Sales tax laws vary widely across the U.S., and whether your food products are taxed depends on the state—and the type of food you’re selling.

Across the U.S., sales taxes on groceries vary. Some states fully exempt grocery items, while others charge full or reduced rates. As of April 2026, 13 states still impose a statewide sales tax on groceries.

This guide will walk you through different food categories and state-by-state grocery tax guidelines.

What Counts as Grocery Food?

When states talk about “groceries,” they typically refer to non-prepared food intended for home consumption. Most states now follow the Streamlined Sales Tax (SST) definitions to determine what is exempt:

• Grocery Staples: Unprepared fruits, vegetables, meats, grains, and dairy. Most states exempt these, but some exclude “luxury” items like bottled water or soda.
• Candy & Soft Drinks: Candy is a preparation of sugar, honey, or other natural or artificial sweeteners, combined with chocolate, fruits, nuts, or other ingredients or flavorings, in the form of bars, drops, or pieces.
  Under SST rules, if a product contains flour or requires refrigeration, it may be classified as “food” (exempt). If it is a sugar-based confection without flour, it is “candy” (taxable).
• Prepared Food: Ready for immediate consumption (hot meals, sandwiches).
  • The 80/80 Rule: In states like CA and VA, if a business derives more than 80% of its revenue from food sales and more than 80% of those items are “ready-to-eat,” all items may be subject to tax.

Grocery food

Most states do not tax these items, but some still do. These are typical items found in grocery or convenience stores:

• Fruits, vegetables, meats, grains, dairy
• Canned goods, bottled water, packaged snacks
• Non-carbonated drinks, baking ingredients

Prepackaged food

Some states tax these differently from unprocessed groceries. These are processed items ready for sale but not meant for immediate consumption:

• Frozen meals
• Bottled beverages
• Packaged sandwiches or shelf-stable meals

Prepared food

Prepared food is ready for immediate consumption and includes:

• Hot meals, salads from a bar, heated sandwiches

• Items from delis, bakeries, or restaurants

Note: This guide does not cover restaurant sales tax since it’s outside the scope of grocery ecommerce.

Grocery Tax by State (2026)

The table below outlines the taxability of non-prepared grocery food by state. Most states that exempt grocery food exclude soft drinks, candy, and confections. States also charge sales tax for prepared food in restaurants and grocery stores, as it is a meal.

Of the 45 states that impose a sales tax, 13 impose a statewide sales tax on groceries.

Note: Sales tax regulations keep changing frequently. Bookmark this table to keep yourself updated about the latest developments regarding sales tax on grocery food.

*Local taxes may still apply in many states even when groceries are exempt from state-level tax.

Key Insights: States with No Food Tax (2026)

Here are some quick takeaways from the “grocery tax by states” table.

• Arkansas and Illinois are the latest states to eliminate state-level grocery taxes (effective Jan 1, 2026), joining Kansas (2025).
• In states like Georgia, Alabama, and Colorado, even if the state rate is low or $0, local jurisdictions can add 3-5% in additional taxes.
• With recent changes, Idaho (6%) now holds the highest state-level grocery tax in the U.S.
• Many states tax snacks but exempt “food.” If your product contains flour, it is often legally “food” (exempt) rather than “candy” (taxable).

State-Specific Grocery Tax Deep Dives

California: The 80/80 Rule

• 80% of your revenue comes from food
• 80% of that food is sold in a ready-to-eat state

Illinois: The New 1% Local Mandate

Texas: The Snack vs. Food Distinction

What This Means for Your Ecommerce/CPG Food Business

If you’re selling food, beverages, or snacks online, the rules on food tax vary wildly—and they change often. To stay compliant, you must:

• Map your products to SST codes: Ensure you aren’t charging tax on a “snack” that qualifies as “food.”
• Monitor Nexus: Selling in high-volume states like Illinois or California requires tracking local tax changes.
• Automate: Manual tracking is a recipe for an audit.

Frequently Asked Questions

Key Takeaways

• Most basic clothing items that are deemed necessary for daily use are generally exempt from sales tax in many states. However, the exemption can be limited, partial, or full.
• Luxury apparel, such as jewelry, designer bags, and expensive clothing lines are commonly subject to sales tax or “luxury tax” in various states.
• A few states offer limited exemptions on the sale of clothing, typically during their state-mandated sales tax holidays.
• Online retailers are still required to collect once they establish a nexus in a taxing state, and they are selling a taxable product.
• Discounted clothing can be subject to taxation, depending on the state’s rules.

What is Clothing Sales Tax?

Which Clothing are Subject to Sales Tax?

• Luxuries or
• Necessities

Luxury Apparel vs Essential Clothing

• Luxury Apparel – applies to items that are generally not purchased for everyday use, such as expensive designer clothes and accessories, or garments made from fur
• Essential Clothing – applies to items that are typically purchased for essential daily use, such as casual attire and undergarments that are frequently bought at affordable prices

Examples of Taxable vs Non-taxable Clothing in the U.S

• Accessories: Items like jewelry, non-medically prescribed eyewear, fashionable hats, and designer handbags.
• Fur garments: States that still allow manufacturing fur clothing often subject fur clothing to sales tax, even if the clothing type is exempt. As long as the item is made with fur, it typically overrides the initial sales tax exemptions.
• Formal attire: Generally, clothing such as evening gowns or dresses, tuxedos, and other formal outfits tend to be subject to sales tax, regardless of whether the item is purchased or rented.
• Protective gear: Safety goggles, sturdy hats, and work gloves are usually taxable.
• Sports equipment: Athletic items such as arm bands, protective pads, performance fabrics, helmets, and the like are often taxable. However, some states may offer an exemption to sports wear if the state is encouraging athletic activities. 

• Uniforms: Since uniforms are often worn daily, they are recognized as necessities. Therefore, this type of clothing is typically exempt from sales tax in many states.
• Religious attire: To promote religious freedom, some states may exempt religious garments from sales tax.
• Essential garments: Basic apparel used for common daily activities, such as shirts, dresses, trousers, skirts, socks, undergarments, and shoes, are commonly exempt from sales tax.
• Children’s clothing: Most states generally exclude children’s supplies and clothing from sales tax. However, take note that it could either be a full sales tax exemption or a partial one, depending on the state’s rules.

States With No Sales Tax on Clothing

1. Massachusetts
2. Minnesota
3. New Jersey
4. New York
5. Pennsylvania
6. Rhode Island 
7. Vermont

State-by-State Guide for U.S Sales Tax on Clothing

Why Clothing Is Taxed Differently Across States

Sales Tax on Skins or Digital Apparel

Clothing Sales Tax Holidays

• Alabama (Back-to-School): Clothing ($156 or less/item)
• Alaska (Tax-Free Holiday): Most items are exempt
• Arkansas (Back-to-School): Clothing and footwear ($100/item or less) and accessories or equipment ($50/item or less)
• Connecticut (Back-to-School): Clothing and footwear ( $100 or less), accessories, and protective or athletic clothing are not included in this exemption
• Florida (Back-to-School): Clothing, wallets, and bags (up to $100)
• Iowa (Back-to-School): Clothing and footwear (less than $100)
• Maryland (Back-to-School): Clothing and footwear ($100/item or less) and backpacks (only the first $40)
• Massachusetts (Annual Tax Holiday): Tangible Personal Property (up to $2,500)
• Mississippi (Back-to-School): Clothing and footwear (less than $100)
• Missouri (Back-to-School): Clothing (less than $100)
• New Mexico (Back-to-School): Clothing and shoes ($100/item or less) and book bags, backpacks, maps, and globes (less than $100 per item). Retailers are not required to participate.
• Oklahoma (Back-to-School): Clothing and footwear (less than $100), excluding non-essential apparel
• South Carolina (Back-to-School): Clothing, footwear, and clothing accessories
• Tennessee (Back-to-School): Clothing and shoes ($100/item or less)
• Texas (Back-to-School): Clothing and footwear (less than $100) and backpacks, excluding non-essential apparel
• Virginia (Three-Day Sales Tax Holiday): Qualified exempt clothing and footwear (less than $100/item)
• West Virginia (Back-to-School): Clothing (less than $125) and sports equipment (less than $150)

How to Calculate Sales Tax on Clothing?

• Price of Goods + Shipping Fee x
• State Sales Tax Rates +
• Local Sales Tax Rates
• = Your Total Sales Tax

• The taxable clothing product is worth $60 and was purchased in Conway, Arkansas, where clothing is taxable. 
• The combined state, county, city, and other local sales tax rates in Conway, Arkansas, are currently at 8.75%.
• Convert the state’s combined sales tax rate into decimal format. 8.75% turned into decimal format is: 0.0875
• Now, multiply the sale price by the decimal format of the combined sales tax rate of the city, county, and state.
  60 x 0.0875 is = $5.25
• Finally, add everything to the base sales price to accurately determine the sales tax on the taxable apparel.
  [Product Price] $60 +
  [Calculated Sales Tax] $5.25
• TOTAL = $65.25

Sales Tax on Discounted Clothing, Donations, and Returns

• $200 minus $50 is $150. This is your discounted purchase price.
• New York’s sales tax exemption on clothing is capped at apparel worth $110. 
• Therefore, the entire transaction is still taxable as it exceeded the threshold.
• For that, take the state’s sales tax rate plus any applicable local charges to get the right tax rate.

• 150 (sales price with discount coupon) x
• 0.08875 (New York’s state sales tax rate in decimal format) 
• = $13.31 (rounded off sales tax)
• Now, take the calculated sales tax and add it to the price of the discounted apparel.
• $13.31 sales tax + $150 apparel
• TOTAL PURCHASE PRICE: $163.31

When to Collect Sales Tax on Clothing?

What is Sales Tax Nexus?

Physical Nexus

• Physical Location: Having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
• Inventory in the State: Storing products within the state, whether it’s done via a third-party fulfillment center or 3PL (such as Amazon FBA) or an online marketplace.
• Business Representatives: Having employees, independent contractors, agents, or other representatives operating within the state on your behalf.

Economic Nexus

• Total sales revenue and/or
• The number of transactions you’ve had within the state. 

Who Needs to Collect Sales Tax on Clothing?

• State-based Businesses: Generally, in-state businesses can quickly establish a physical nexus in the state due to having physical presence, such as having physical stores or warehouses. This often leads local businesses to register almost immediately, unlike remote sellers selling in another state.
• Out-of-state Businesses (Online Sellers): Remotely selling taxable clothes in a state can still make you liable to sales tax obligations once you establish an economic nexus in a state. This means that even if you have no physical presence in the state, businesses must still register for sales tax as long as they create an economic nexus.

How Clothing Retailers Can Stay Sales Tax Compliant

1. Keep track of your nexus – It’s important to know where you stand in the “invisible bridge” that connects your business to a state’s economic system. Once you cross that bridge and establish a nexus, you’ll have to register and comply with tax regulations. Failure to comply results in penalties that can harm your business.
2. Check every state’s specific rules – Never assume that one state’s sales tax rule is the same as another’s. Even if some rules seem common among many states, it’s still best to navigate safely by verifying every individual state’s specific rules. 
3. Always keep records – Your transactions are proof of your business activities. Once your business creates a nexus, a good practice to stay compliant is to maintain records. These records will help your business stay clear during audits and prevent penalties.
4. Identify your product’s taxability – The taxability of clothing varies depending on the state’s specific rules and guidelines. You must know where your product is subject to taxation and where it is exempt, whether partial exemption or not.
5. Calculate carefully – Clothing sales tax can be complicated, as each line has to be processed, especially when considering additional discounts and other factors that can alter the default rates. Even a small difference in the report can cost you an audit.  When calculating apparel taxes, always be mindful of local surcharges, district taxes, and local option taxes that may apply to your transactions.

Let TaxHero Help Manage Your Clothing Sales Tax

Frequently Asked Questions

Key Takeaways

• Each state has different rules regarding the taxability of services. Some states may exempt a specific service, while others may not
• Charging sales tax on services is not required unless your business has a sales tax nexus in a state and you are selling a taxable service in that state.
• What’s exempt at a state-level can still be subject to local sales tax. It’s important to check local or home rules, especially for sales tax on services.
• The taxability of bundled transactions where both goods and services are sold together can be determined through a “true object test.”
• Rules can change anytime. An exempt service today can be taxable tomorrow. Staying updated with the latest news is important.

Goods vs. Services: What’s the difference?

• Goods – Defined as TPP or “Tangible Personal Property” items, such as furniture, automobiles, jewelry, beauty products, clothing, appliances, electronics, food items, and more.
• Services – Refers to intangible activities that may or may not produce a tangible good. Services include legal, consulting, advertising, personal grooming, repairs and maintenance, and more.

What are the different types of “Services”?  

1. Business Services – includes consulting, advertising, computer services, lobby, and human resource services.
2. Personal Services – includes various self-improvement and personal grooming services, such as dry cleaning, salons, and spas. Animal grooming is also included in personal services and is taxable in some states.
3. Professional Services – services provided by licensed and certified professionals such as accountants, lawyers, physicians, attorneys, doctors, and architects. These services are taxable only in some states due to powerful lobbying.
4. Services to TPP – refer to services directly related to the sale of tangible personal property (i.e., products). These services include repairs and maintenance, shipping or delivery, warehousing, engineering, installation, and rental services.
5. Amusement and Recreation Services – services that provide entertainment, fun, and enjoyment to individuals. They include amusement parks, sports events, concerts, and sightseeing tours.
6. Service to Real Property – services directly related to immovable property (i.e., buildings) and real estate. They include building improvement, construction, architectural, property management, property maintenance (i.e., lawn service, cleaning/janitorial services), and broker services.

When to Charge Sales Tax on Services?

• Taxability of Services: Understanding the taxability rules for services in each state where you conduct business is vital. Each state has different guidelines regarding which services are subject to sales tax.
• Nexus Requirements: You only need to focus on the states where your business has established a physical and economic nexus. Nexus refers to having a significant presence or connection in a state that triggers tax obligations.

How to Determine Service Taxability Using the True Object Test

• An accountant charges you for their financial reporting service. The report is a physical documentation that makes it a tangible personal property being sold along with the service.
• Your main purpose is to obtain that report to use for your business’s financial planning.
• However, there won’t be a report at all without the accountant’s services in the first place. In other words, the transaction can’t be accomplished without the accounting services involved.
• Therefore, the “true object” here is the service provided, not just obtaining the report. Thus, the transaction is defined solely as a “service” and not the sale of tangible personal property or equipment. With this, the confusion of a service’s taxability can be easily cleared.

Sales Tax on Services by States

Which state taxes the most services?

Which state taxes the fewest services?

• Alabama
• Colorado
• Georgia
• North Dakota
• Wyoming

How to Stay Compliant with Varying Rules for Sales Tax on Services

1. Check the state’s tax rules thoroughly – Whether you are selling from North to South, it’s important to know the specific rules of every state you are dealing with. One state may tax certain services, while another may not.
   Additionally, local taxability also matters. Sometimes, what’s tax-exempt at a state level may still be subject to local sales tax. To keep everything covered, you should also check the city or county’s rules when it comes to the service’s taxability.
2. Consider your nexus – Before you worry about charging sales tax on your services, first, you need to ask, should you collect sales tax at all? If you have no sales tax nexus in a state, you are generally not required to register and have no obligation to collect sales tax from your services.
   This means even if your services are subject to sales tax, charging sales tax is not mandated until you establish an economic nexus in the state you are selling to.
3. Keep in mind that rules change over time – What’s exempt today may become taxable tomorrow. Never let your guard down when it comes to taxabilities of your products and services. To ensure you stay updated, you can consider doing the following:
   – Visit state websites directly for more official and verified news.
   – Subscribe to sales tax channels that provide nationwide updates.
   – Follow accounts or pages that announce relevant sales tax news.
4. Do a true object test when necessary – As explained earlier, a true object test is done by certain states to accurately determine a service’s taxability. If a transaction’s main purpose involves the sale of a tax-exempt service, then the transaction should be exempt from sales tax.
   However, if a transaction primarily involves the sale of tangible personal property or equipment along with the service, then the transaction may be defined as a retail sale rather than a tax-exempt service.
   That means the transaction is determined to be taxable based on the “true object” test.
5. Use a reliable sales tax software – Consider using a sales tax software that can do everything for you, including alerting you whenever there’s a new rule that may impact your business.
   If you need help with sales tax compliance, you can try out TaxHero’s free demo and learn how we fully take sales tax compliance off your hands.

Local Sales Tax on Services

• Electrolysis
• Tanning Services
• Massage Services
• Beautician Services
• Credit Rating Services
• Manicure and Pedicure
• Services provided by weight control and Health Salons, Gyms, Sauna Baths, and other similar facilities

Common Mistakes When Managing Sales Tax on Services

• Assuming the taxability – This mistake happens anywhere related to sales tax compliance. Assuming a product’s taxability and not verifying with official resources, such as state websites, can cause you unwanted liabilities. 
• Skipping the true object test – It’s not always easy to determine on the spot whether your service is taxable or not. In some states, like Colorado, you must do a true object test to identify if your service is the “true object” of the transaction.
  However, if a tangible personal property or equipment involved with the service is the “true object” of the transaction, then your sale may become subject to sales tax. Whenever you’re in doubt about your service’s taxability, don’t miss out on doing a true object test.
• Not checking local taxability – In line with the first mistake, it’s also common to forget that some localities have their own rules. To avoid penalties, always keep in mind that state-level exemptions may not always apply locally.

Why Sales Tax on Services Continues to Expand

Simplify your Sales Tax Compliance with TaxHero

Frequently Asked Questions

What are Digital Goods?

What counts as a digital good?

• It is delivered electronically rather than shipped in a physical format. This includes products downloaded to a device, accessed via login, or streamed online.
• The customer uses the product digitally, such as reading, listening, watching, or interacting with it on a device, rather than owning a physical copy.

Consuming something digitally vs owning it physically

• Owning a physical product means the customer receives a tangible item, such as a printed book, a CD, or a DVD. Sales tax rules for these products are usually well established.
• Consuming a product digitally means the customer accesses the same content electronically, such as downloading an ebook, purchasing a digital movie file, or subscribing to a streaming service.

 Common examples of digital goods

• Music and audio files that are downloaded or accessed digitally, such as songs, albums, or audiobooks.
• Ebooks and digital publications, including ebooks, digital magazines, and PDF guides.
• Apps and software downloads, such as paid mobile apps or downloadable desktop programs.
• Cloud-based software and SaaS tools that are accessed online through a subscription or account.
• Video games and downloadable content, including full digital games and in-game add-ons.
• Online courses and digital training materials are delivered through platforms or downloads.
• Streaming media, such as movies, TV shows, or music accessed through streaming services.
• Digital art, stock photos, videos, NFTs, and other creative digital assets.
• Licenses, activation keys, templates, and virtual tickets that unlock access to software, events, or content.

Why Sales Tax Laws for Digital Goods Are So Complicated

 Sales tax laws weren’t built for digital products

• Treat digital goods like taxable products anyway, or
• Treat them as non-taxable intangible items, or
• Create brand-new categories and rules (which some states have done).

How the Wayfair decision changed digital sales tax

States are still updating their rules

Why Digital Goods Are Taxed Differently by States

Downloads vs. online access

• Permanent downloads: The customer purchases a file and keeps it (e.g., downloading an ebook or buying a movie download).
• Subscriptions or online access: The customer pays for access, often through a login, and may lose access if they stop paying (example: SaaS tools, membership libraries, or some digital course portals).
• Streaming or temporary access: The customer watches or listens without “owning” a file, or they rent access for a limited time (example: streaming a movie or renting it for 48 hours).

Physical products vs digital versions (same content, different tax outcome)

• Physical book: may be taxed normally, or may qualify for a special exemption in some states.
• Ebook: could be taxable as a digital product, or not taxable as an intangible item, depending on the state.

 Products that are exempt physically but taxable digitally

• Textbooks or educational materials: A printed book might be treated favorably in a state, while the digital version may not receive the same treatment.
• Newspapers and publications: Some states treat print newspapers differently than digital subscriptions.
• Certain “information products”: Reports, data, or publications can fall into special categories that vary by state.

The Streamlined Sales Tax (SST) and Digital Goods

What the Streamlined Sales Tax (SST) is

How SST defines digital products

 The three SST digital product categories

• Digital audiovisual works, which include movies, television shows, and other video content delivered electronically. These can be downloaded or streamed, depending on the product.
• Digital audio works, which include music, audiobooks, and other audio content delivered digitally.
• Digital books, which include ebooks and other written content delivered in digital form.

Why SST definitions don’t guarantee tax exemption

Sales Tax on Digital Goods by State

How to read state digital tax rules

• Taxable vs non-taxable: Some states explicitly tax certain digital goods, while others exempt them or do not address them at all. In states without clear guidance, digital products may default to taxable or non-taxable depending on how the law is written.
• Local tax impact: Even if a state taxes digital goods, local counties or cities may add additional sales tax. This means the total tax rate can vary within the same state.
• Different digital product categories: States may tax downloads, subscriptions, and streaming services differently. A digital product being taxable does not always mean all digital formats are treated the same.

High-level state classification

• States that generally tax digital goods, meaning they have laws or guidance that treat many digital products as taxable.
• States that generally do not tax digital goods, either because they exempt them or do not classify them as taxable products.
• States with no general sales tax at all, which means digital goods are not subject to sales tax by default.

Understanding Nexus for Digital Goods Sellers

Physical nexus

• Offices, employees, or inventory can establish nexus if you maintain a workspace, store inventory, or operate facilities in a state, even if digital goods are your primary product.
• Remote employees can create nexus simply by working from their home in another state. A single remote employee may be enough to trigger a sales tax obligation.
• Events and trade shows can also create nexus if your business regularly attends conferences, expos, or promotional events in a state, even if no direct sales occur onsite.

Economic nexus

• Revenue thresholds are commonly set around a specific dollar amount of sales into a state, often measured annually.
• Transaction thresholds are based on the number of individual sales transactions, regardless of the dollar value of each sale.
• Non-taxable sales still count toward these thresholds, meaning that even if a state does not tax digital goods, those sales can still create nexus and trigger registration requirements.

Why do digital products trigger nexus faster?

• Low-cost downloads can generate a high number of transactions in a short period of time.
• High transaction volume means a business can cross transaction thresholds without realizing it, especially with small-priced digital items.
• Marketplace involvement can complicate the nexus further, as some states have special rules for marketplace facilitators and third-party sellers of digital goods.

Common Digital Goods Sales Tax Traps

• Assuming “digital equals non-taxable” can lead to under-collecting tax in states that treat digital goods as taxable products.
• Treating subscriptions and downloads the same is risky because many states tax permanent downloads differently from streaming or subscription access.
• Ignoring local taxes can result in under-collection, especially in states where cities and counties impose additional sales tax.
• Missing nexus in low-revenue states happens when sellers focus only on revenue thresholds and overlook transaction-based thresholds.
• Relying on outdated guidance can create compliance gaps, as digital tax rules change frequently and older assumptions may no longer apply.

Best Practices for Handling Sales Tax on Digital Goods

Maintain strong sales records

• Customer location proof helps establish where the sale took place and which state’s rules apply.
• Product taxability decisions should be documented so you can explain why tax was or was not collected.
• Exemption documentation is important if certain transactions qualify for exemptions under state law.
• Marketplace vs direct sales records help clarify who is responsible for collecting and remitting tax.

Be transparent with customers

• Showing tax clearly at checkout makes it obvious how the final price is calculated.
• Explaining why tax applies can help customers understand why digital purchases may be taxed.
• Location-based rate differences should be reflected accurately to avoid over- or under-collection.

File and remit on time

• Penalties for late filing can add up quickly and increase total tax liability.
• Audit risk often increases when filing patterns are inconsistent or incomplete.
• Consistency matters because regular, accurate filings build credibility with tax authorities.

Use automation where possible

• Rate calculation tools help ensure the correct tax rate is applied based on location and product type.
• Filing support can streamline returns across multiple states.
• Nexus monitoring helps track when thresholds are met so obligations are not missed.
• State registration assistance can simplify the process of becoming compliant in new jurisdictions.

Digital Goods Still Carry Real Tax Risk