Whether a state taxes services depends heavily on where you are: four states tax nearly every service by default, five states have no general sales tax at all, and the roughly forty states in between tax only the specific services their legislatures have named in the tax code. So the short answer to what states tax services is most of them, but only some services in most places. If you sell a service, you cannot assume it is exempt just because it is not a physical product, and you cannot assume it is taxable either. The category matters, the state matters, and increasingly, where your customer is located matters.
The Four States That Tax Services Broadly
A small group of states treats virtually every service as taxable unless the legislature has carved out a specific exemption. If you run a service business in one of these states, work from the assumption that your service is taxable and look for an exemption, not the other way around.
Hawaii
Hawaii imposes a General Excise Tax (GET) on businesses for the privilege of operating in the state. Unlike a traditional sales tax charged to the buyer, the GET is technically a tax on the business itself, calculated on gross income from all business activity.1State of Hawaii Department of Taxation. An Introduction to the General Excise Tax Because the base is so broad, it reaches nearly every transaction, including professional fees from doctors, lawyers, and engineers. The state GET rate is 4% on most retail transactions, and every county has adopted a 0.5% surcharge, bringing the combined rate to 4.5%.2Department of Taxation. General Excise Tax (GET) Information Businesses may pass this cost on to customers as a line item on an invoice, though they are not required to do so.3State of Hawaii Department of Taxation. County Surcharge on General Excise and Use Tax
New Mexico
New Mexico uses a Gross Receipts Tax (GRT) that functions similarly to a sales tax but applies to practically all services performed for payment. The system presumes every receipt is taxable unless a specific statutory deduction applies. Combined state and local rates vary by location and can exceed 10% in some areas, so you need to verify the exact rate for each jurisdiction where you operate.
South Dakota
South Dakota taxes services by default at the state rate of 4.2%, and its statute specifically lists professional services, including legal services and accounting, as subject to tax.4South Dakota Legislature. South Dakota Codified Law 10-45 The state does allow attorneys and accountants to deduct from gross receipts any amounts they spend on behalf of clients, as long as those expenses are separately itemized on the bill. Engineering, architectural, and surveying services performed entirely for projects outside South Dakota are exempt.
West Virginia
West Virginia taxes services at a state rate of 6%, but its definition of taxable “service” is narrower than it first appears. The state taxes “all nonprofessional activities” performed for others for a fee, while specifically excluding professional services (such as legal work and accounting), personal services (such as barbering and manicuring), and construction contracting.5West Virginia Legislature. West Virginia Code 11-15B-2 Nonprofessional services like janitorial work, equipment repair, and data processing are taxable by default.
The Five States With No General Sales Tax
Alaska, Delaware, Montana, New Hampshire, and Oregon impose no general statewide sales tax. Residents and visitors can purchase goods and services without a state-level sales tax charge, and these states rely on other revenue sources including corporate income taxes, property taxes, and resource extraction fees.
Alaska is the exception within the exception. Local municipalities can levy their own sales taxes, and over a hundred of them do, with rates ranging from 1% to 7%.6Office of the State Assessor, Division of Community and Regional Affairs. Alaska Tax Facts State law gives cities and boroughs broad authority to decide what is taxable, so a service performed in one borough may be taxed while the same service in a neighboring area is not.7Division of Community and Regional Affairs. Alaska Sales Tax Information A business in one of those areas could even owe tax to both its city and borough.
New Hampshire and Delaware do not have broad sales taxes but impose targeted taxes on specific industries. New Hampshire charges an 8.5% meals and rooms tax on restaurant food, hotel stays, and motor vehicle rentals.8NH Department of Revenue Administration. Meals and Rooms (Rentals) Tax These narrow levies apply only to their designated sectors, not to services generally.
How the Other States Approach Services
In every other state, the default flips. Only services the legislature has specifically named, often called “enumerated” services, are taxable. If your service is not on the list, it is exempt. The lists vary state to state, but certain categories appear again and again.
Repair and Maintenance of Physical Items
Work performed on tangible personal property is one of the most widely taxed service categories. When a mechanic fixes a car or a technician repairs an appliance, the labor charge is usually taxable alongside any replacement parts. Some states extend this to pet grooming, since pets are classified as tangible personal property.
Personal Services
Many states tax services performed directly on a person: dry cleaning, laundry, tailoring, hair styling, tanning, and photography. Some states tax only a handful of these; others cast a wider net.
Business and Information Services
Services provided to other businesses are commonly enumerated as well. Typical examples include janitorial and cleaning services, extermination, telephone answering services, credit reporting, and private investigation. A growing number of states also tax information services, meaning the sale of compiled data, mailing lists, financial reports, and similar products delivered electronically or in print.
Real Property Services
Work performed on buildings and land, such as landscaping, lawn care, and building maintenance, is taxable in many states. Construction contracting sometimes falls into this category, though a number of states treat it separately with its own set of rules.
Because each state defines its own list, the only reliable way to confirm whether your particular service is taxable in a given state is to check that state’s current tax code or contact its revenue department directly.
Software as a Service
SaaS is one of the fastest-changing corners of service taxation, and it deserves its own look because the rules do not line up with the broader categories above. Roughly two dozen states currently treat SaaS as taxable, and they take three different approaches. New York, Texas, and Pennsylvania treat SaaS as a taxable service, reasoning that subscribers are paying for ongoing access to functionality. Others consider SaaS an intangible product and exempt it from sales tax entirely. A third group taxes SaaS conditionally, for example by taxing off-the-shelf cloud software but exempting custom-built applications, or by distinguishing business-to-business from business-to-consumer sales.
States with broad-based service taxes, including Hawaii, New Mexico, and South Dakota, generally tax SaaS automatically because their codes already cover most services. In states that tax only enumerated services, whether SaaS is taxable depends on whether the legislature has specifically added it, or a category broad enough to cover it, to the taxable list. This area changes frequently, so SaaS providers selling across state lines need to monitor legislative updates closely.
What Happens When You and the Customer Are in Different States
If your customer is in one state and you are in another, two questions matter: whether the state where the customer sits can require you to collect its tax, and whose rate applies.
On the first question, a state can require your business to collect sales tax only if you have a sufficient connection there, a concept called “nexus.” Until 2018, nexus generally required a physical presence such as an office or employee in the state. The U.S. Supreme Court’s decision in South Dakota v. Wayfair changed that, ruling that states can require tax collection from businesses with no physical presence as long as they meet an economic activity threshold.9Supreme Court of the United States. South Dakota v. Wayfair, Inc. The South Dakota law upheld in Wayfair applied to sellers delivering more than $100,000 of goods or services into the state, or completing 200 or more separate transactions, in a single year. Every state with a sales tax has since adopted a similar economic nexus law, though many have dropped the transaction count and use only a dollar threshold (typically $100,000, though a few states set theirs higher). These thresholds apply to service providers just as they do to sellers of physical goods. A remote accounting firm, software company, or marketing agency that exceeds the threshold in a state must register, collect, and remit that state’s sales tax on any taxable services.
On the second question, most states use destination-based sourcing, meaning the tax is owed where the customer receives the benefit of the service. If you consult from one state for a client in another, the client’s location determines which state’s tax rate applies and which state receives the revenue. A minority of states, including Texas, Ohio, and Virginia, use origin-based sourcing and apply the tax rate of the seller’s location. Determining where a customer “receives the benefit” of intangible work like consulting or data analysis can be complicated. States generally look first at whether the service relates to property in a specific location, and if not, at where the customer is physically located when the service is delivered. When neither factor is clear, the customer’s billing address often serves as a fallback.
One related point for buyers: if you purchase a taxable service from an out-of-state provider who does not charge sales tax, you may owe “use tax” to your own state at the same rate, reported on your regular sales tax return if you are a business or your state income tax return if you are an individual.
What It Costs to Get This Wrong
If your business should have been collecting sales tax on services and was not, the state can assess the uncollected tax against you, plus penalties and interest. Penalties for late or missing sales tax payments typically range from 5% to 25% of the unpaid amount, depending on how late the payment is and the state’s specific rules. Interest accrues on the outstanding balance from the original due date until the tax is paid in full.
Audit exposure is a particular risk for service businesses, because many owners do not realize their services are taxable in a given state. When an auditor discovers uncollected tax, the assessment often covers multiple years of back taxes. Most states require businesses to keep sales tax records for three to four years, though some mandate retention periods of six or seven years. Intentional failure to collect or remit sales tax can result in criminal charges on top of civil penalties.
The practical steps are straightforward. Check each service you sell against the current tax code for every state where you have nexus, register for a sales tax permit in those states, and file returns on the required schedule, even when you owe nothing for a given period, since many states penalize failure to file a zero-dollar return.