The Ultimate Guide for Sales Tax on Services

Navigating the complex and ever-changing sales tax on services can be challenging for businesses and is usually more complicated than understanding sales tax on goods.

The common misunderstanding is that only physical goods are subject to sales tax, and services are somehow exempt. However, clarifying this misconception is essential because many businesses are unaware of the changing rules and regulations when collecting sales tax on services. In recent years, an increasing number of states have started requiring sales tax on services and are continuously updating their guidelines on what is taxable and what is exempt.

This guide aims to clarify sales tax on services across the states and serves as a valuable resource to streamline sales tax compliance for businesses and tax professionals. 

 

Goods vs. Services: What’s the difference?

To better understand how sales tax guidelines distinguish between “goods” and “services,” let’s define these terms and highlight their fundamental differences.

• Goods. Defined as TPP or “Tangible Personal Property” items, such as furniture, automobile, 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”?  

Services cover many activities, but we can make things easier to understand by grouping them into a few broad categories.

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.

Some other services are educational, healthcare, and nonprofit organization services. Typically, these services are exempt from sales tax in all states.

 

Do I Charge Sales Tax on Services?

Each state has its rules and regulations on what type of service to charge sales tax. Just like products, not all services are subject to sales tax. New sales tax regulations are being implemented frequently on services as service-based businesses grow in the United States.

As a business, you must determine whether you need to charge sales tax on services before running a service-based business.

To determine if your business is eligible to collect sales tax on the services you provide, there are a few crucial factors to consider:

• 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.

You should register for a sales tax permit in states where your business meets these criteria. This registration ensures compliance with sales tax regulations specific to your services.

 

Sales Tax on Services by States

The following table summarizes each state’s general services category subject to sales tax.

Note: Within each category of services, each state can have different regulations for sales tax and what is taxable within that category. Please refer to the State’s Department of Revenue website for guidelines on whether a specific service is taxable.

STATE ARE SERVICES TAXABLE? SALES TAX RATE EXEMPTIONS Alabama No n/a Services are generally not taxable. Alaska not applicable 0% None. There is no sales tax in this state. Arizona No n/a The majority of all service-based transactions, such as professional services, advertising, and cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Job Printing Pipeline Prime Contracting Private Car Line Telecommunications Transient Lodging Transporting Utilities Arkansas Yes 6.50% Personal and business services, services to TPP, amusement, and services to real property California No n/a None Colorado No n/a None Connecticut No n/a The majority of all service-based transactions, such as medical services and engineering, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Advertising or public relations services Computer and Data Processing Credit Information and Reporting Exterminating Services Dry Cleaning Services Management Delaware not applicable 0% None. There is no sales tax in this state. Florida No n/a The majority of all service-based transactions, such as professional services, advertising, and salon services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Detective and other protection services Fingerprinting services Non-residential cleaning and pest control services Charges for admission to any place of amusement, sport, or recreation  Georgia No n/a None Hawaii Yes 4% Personal and business services, services to TPP, amusement, and services to real property Idaho No 6% Taxable services: Food/drink or serving services, accommodation services, Intrastate air transportation services, manufacturing or production services, Taxidermy services, tire service Illinois No n/a None Indiana No n/a None Iowa No n/a The majority of service-based transactions, such as advertising, employee service, and construction, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Building maintenance like janitorial and cleaning services (non-residential only) Alteration and garment repair Barber and beauty services Photography Jewelry and watch repair Landscaping, lawn care, and tree trimming and removal Sewing and stitching Tanning beds or tanning salons Demolition Kansas Yes 6.50% Services to TPP and amusement Kentucky Yes 6% Recreation Louisiana No n/a The majority of service-based transactions, such as professional services, advertising, and employment services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Coating, wrapping, and galvanizing pipe and other property Laundry, cleaning, pressing, and dyeing services Repairs to autos, appliances, equipment, and other property Storage space for clothing, furs, and rugs Vehicle storage and parking Cold storage space Hotel occupancy Printing services Telecommunications services Maine Yes 5.50% Personal services and services to TPP Maryland No n/a The majority of service-based transactions, such as professional services and advertising, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Manufacturing or producing personal property Transportation of electricity or natural gas Certain telecommunications services Credit reporting services Security services Commercial cleaning and janitorial services Massachusetts No n/a None Michigan No n/a None Minnesota Yes 6.88% Personal and business services, services to TPP, amusement, and services to real property Mississippi Yes 7% Business services, services to TPP, amusement, and services to real property Missouri No n/a The majority of service-based transactions, such as professional services, advertising, and cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Admissions to places of amusement, entertainment and recreation, games, and athletic events Utilities like electricity, water, or gas to domestic, commercial or industrial users Phone, mobile, and telegraph services Hotel stays, restaurant meals, and drinks from places like hotels, diners, and bars Transportation services like taxis, rideshares, buses, etc. Montana not applicable 0% None. There is no sales tax in this state. Nebraska Yes 5.50% Personal and business services, services to TPP, amusement, and services to real property Nevada No n/a The majority of service-based transactions, such as professional services, advertising, and cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Production, fabrication, processing, printing, and imprinting services Food or beverage preparation services New Hampshire not applicable 0% None. There is no sales tax in this state. New Jersey No n/a The majority of service-based transactions, such as professional services, advertising, and interior design services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Information services Investigation and detective services Mail processing services for printed advertising/promotional material Massage services Sign fabrication and installation services Servicing or repair of real property Tanning services Tattooing Telecommunications Utility services Telephone answering services received by customers in New Jersey New Mexico Yes 4.875% Personal, professional, and business services, services to TPP, amusement, and services to real property New York No n/a The majority of service-based transactions, such as professional services, advertising, and laundry and dry cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Utility services Cleaning, maintenance, and repair services Telecommunication (phone and mobile) services Information services Interior decorating and design services Protective and detective services Hotel occupancy Admission to places of amusement Social and athletic club dues Certain cabaret services North Carolina No n/a The majority of service-based transactions, such as professional services, advertising, and janitorial services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Service Contracts Video Programming Services Dry Cleaning and Laundry Services Repair, Maintenance, and Installation Services Telecommunications Services and Ancillary Services Prepaid Telephone Calling Services Satellite Digital Audio Radio Services Admission Charges to an Entertainment Activity North Dakota Yes 5% Recreation Ohio No n/a The majority of service-based transactions, such as professional services and advertising, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Short-term hotel room rentals Private investigation or security services Information services via 1-900 calls Producing goods from customer-supplied materials Exterminating services Physical fitness facility services Recreation and sports club services Vehicle washing, cleaning, waxing, polishing, or painting services Towing services for motor vehicles Laundry and dry cleaning services, excluding coin-operated Business-related data processing, computer, and electronic information services Certain telecommunication services Satellite broadcasting services Personal care services (skin care, cosmetics, manicures, pedicures, hair removal, tattoos, piercings, tanning, massage), excluding hair care In-state person transportation, excluding public transit and commercial airlines Snow removal services with annual sales over $5,000 Storage of tangible personal property, except for inventory storage Oklahoma No n/a The majority of service-based transactions, such as professional services and cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Advertising services Admissions, dues, or fees to clubs, amusement venues, sports events, or for using facilities related to entertainment, recreation, or athletics. Catering services Computer services involving prewritten programs Fabrication services Florist services Hotel accommodation Tanning salons Telecommunications services sourced to Oklahoma Oregon not applicable 0% None. There is no sales tax in this state. Pennsylvania No n/a The majority of service-based transactions, such as professional services, advertising, and laundry and dry cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Adjustment and collection services Lobbying services Disinfecting or pest control service Catering services Help supply services Credit reporting services Lawn care services Premium cable services Self-storage services Rhode Island No n/a None South Carolina Yes 6% Personal services, services to TPP, and amusement South Dakota Yes 4.50% Personal, professional, and business services, services to TPP, amusement, and services to real property Tennessee No n/a Taxable services include: Repair and installation of TPP or computer software, cleaning of TPP, lodging services, animal bathing, Telecommunication and Television programming services, parking, ancillary services Texas Yes 6.25% Business services, services to TPP, amusement, and services to real property Utah No n/a The majority of service-based transactions, such as professional services, advertising, and beauty services, are not subject to sales tax. However, there are specific situations where certain services are taxable like: Laundry and dry-cleaning services Assisted cleaning or washing of tangible personal property Use of assisted amusement devices In-state telecom services Vermont Yes 6% Amusement and services to TPP Virginia No n/a The majority of service-based transactions, such as professional services, clothing alterations, and repair services, are not subject to sales tax. However, if a business offers services that include creating or manufacturing a tangible personal product, it is seen as a retail sale and, therefore, is subject to sales tax. Washington Yes 6.50% Personal and business services, services to TPP, and amusement West Virginia Yes 6% Business services, services to TPP, amusement, and services to real property Wisconsin Yes 5% Services to TPP, amusement, and services to real property Wyoming Yes 4% Amusement and services to TPP

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