Whether a service is subject to sales tax depends entirely on which state you’re asking about. Four states tax nearly all services by default: Hawaii, New Mexico, South Dakota, and West Virginia. Five states impose no general sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. The remaining 41 states and Washington, D.C., tax only the specific services their legislatures have listed. Knowing which category your state falls into tells you whether to start from the assumption that your service is taxable or exempt.
The Three Frameworks States Use
Every state fits one of three approaches, and the framework matters more than any single rule.
Broad-based states tax everything unless the legislature has carved out an exemption. Hawaii, New Mexico, South Dakota, and West Virginia work this way. If you sell a service in one of these states, assume it’s taxable and look for an exemption rather than the reverse.
Enumerated states tax only what the legislature has specifically named. This is how 41 states and D.C. operate. If your service isn’t on the list, it’s exempt. Every state’s list is different, and the lists keep growing.
The five no-sales-tax states impose no statewide sales tax on goods or services. Alaska is the exception within the exception because its local municipalities can and do levy their own sales taxes on services.
States That Tax Nearly All Services
Hawaii
Hawaii doesn’t have a traditional sales tax. It imposes a General Excise Tax on virtually all business activity at a base rate of 4%. All four counties have adopted a 0.5% surcharge, bringing the effective rate to 4.5% for most transactions. The GET falls on the business itself for the privilege of operating in the state. Businesses commonly pass the cost to customers by adding it to the bill, but they aren’t legally required to do so. Unlike a sales tax, the GET technically falls on the seller, not the buyer.
New Mexico
New Mexico’s Gross Receipts Tax works similarly. All business receipts are presumed taxable unless the business can prove otherwise, typically by obtaining a nontaxable transaction certificate from the buyer. The combined state and local rate varies by location, so a consulting firm in Albuquerque and one in Las Cruces face different rates. Everything from legal advice to plumbing falls under this tax, and the burden of proving a receipt isn’t taxable rests entirely on the business.
South Dakota
South Dakota applies its sales tax to the gross receipts of all retail sales, including sales of services. If a service isn’t specifically exempted by statute, it’s taxable. The state rate is 4.5%, with municipalities adding between 1% and 2% on top. A business that knowingly files a false exemption certificate faces a penalty of up to 50% of the tax owed, on top of the original amount due.
West Virginia
West Virginia presumes all sales of goods and services are subject to its 6% sales and use tax unless a clear exemption exists. Municipalities can add their own tax on top of the state rate. Professional services from doctors, lawyers, and accountants are among the carved-out exemptions, but most personal and commercial services are taxable.
States With No General Sales Tax
Alaska, Delaware, Montana, New Hampshire, and Oregon levy no statewide sales tax. Service providers in these states don’t collect sales tax at the state level.
Alaska stands apart because it allows local governments to impose their own sales taxes. Many Alaskan boroughs and cities choose to tax services to fund local infrastructure, and the rules vary by municipality. A service provider operating in multiple Alaskan towns may owe tax in some and not others, which requires checking local ordinances individually.
What Enumerated States Commonly Tax
The 41 states that tax services by list don’t all tax the same ones, but certain categories show up far more often than others.
Repair and Maintenance Labor
Repair services on physical property are among the most commonly taxed services nationwide. The residential-versus-commercial distinction trips up many businesses. In Texas, labor to repair, remodel, or restore nonresidential real property is fully taxable, but the same work on a home, apartment complex, or nursing home is not. Scheduled maintenance that prevents deterioration, rather than fixing something broken, is also exempt in Texas regardless of property type.
Ohio taxes building maintenance and janitorial services, though it exempts providers with less than $5,000 in annual sales of those services. Pennsylvania taxes building cleaning services but exempts building repair services on structures permanently attached to real property, along with interior painting and boiler maintenance. A janitorial company that also does minor repairs needs to know which line items on an invoice are taxable and which aren’t.
Fabrication Labor
Work that creates a new physical product from raw materials is taxable in the vast majority of states, whether broad-based or enumerated. If a customer hands you fabric and you sew a dress, or supplies lumber and you build a bookshelf, the labor to fabricate that new item attracts sales tax. Alabama, California, Idaho, New York, Texas, and many others explicitly tax fabrication labor. Fabrication produces tangible personal property, which has always been the core of the sales tax base.
The line between fabrication and repair is where disputes arise. Rebuilding an engine from scratch might be fabrication; replacing a broken part is repair. Some states exempt the labor portion of a repair invoice when it’s separately stated from parts, but if the invoice lumps everything together, the entire amount may be taxed.
Personal Services
Dry cleaning, hair styling, pet grooming, gym memberships, and tanning are increasingly common targets. Connecticut taxes pet grooming and pet boarding services. These services tend to be politically easier to tax than professional services because the lobbying groups are smaller. Fitness club memberships and tanning salon visits appear on many state lists, and the trend runs toward adding more personal services over time.
What Most States Leave Exempt
Professional Services
Legal, accounting, medical, and engineering services are the least taxed category in the country. Professional groups have historically been effective at keeping these services off tax rolls. In the enumerated states, you’ll almost never find legal advice or an accounting engagement on the taxable list. West Virginia, despite its broad-based approach, exempts professional services from doctors, lawyers, engineers, architects, and CPAs. New Jersey does the same. Hawaii and New Mexico are the major outliers, taxing professional services just like everything else.
Healthcare and Education
Medical services provided by licensed healthcare professionals are exempt in nearly every state. Educational services follow a similar pattern. Even states with aggressive service taxation tend to carve out both categories.
Software and Digital Services
The shift to cloud-based products has created the fastest-moving area of service taxation. As of late 2025, roughly 24 states tax Software-as-a-Service in some form, and the number keeps climbing. The core question is whether software accessed through a browser is more like a product you bought or a service you hired.
Most states that tax software draw a line between pre-written and custom-built. Pre-written software, the kind you buy off the shelf or subscribe to online, is taxable in the majority of states that address it. Custom software designed for one client is often treated as a nontaxable service. This distinction holds in Arizona, Connecticut, Illinois, Indiana, Kentucky, Maryland, Massachusetts, New Jersey, and New York, among others.
New York taxes information services under Tax Law section 1105(c)(1), which covers the business of collecting, compiling, or analyzing information and furnishing reports. Credit reports, market research, and stock analysis delivered electronically all attract sales tax. Washington began taxing digital products in 2009. Texas classifies SaaS as a data processing service and taxes 80% of the charge while exempting the other 20%.
States where SaaS is currently taxable include Arizona, Connecticut, Hawaii, Kentucky, Louisiana, Maryland, Massachusetts, New Mexico, New York, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, Washington D.C., and West Virginia, among others. Illinois only taxes SaaS within Chicago’s city limits, adding a local wrinkle to an already complicated picture.
Bundled Transactions
When a business sells a taxable service and a nontaxable product together for a single price, the tax treatment gets complicated fast. Bundled transactions are a common audit trigger because the rules vary significantly by state.
In most states, if at least one item in a bundle is taxable and the prices aren’t broken out separately, the entire charge may be taxed. Some states use a 50% threshold: if the taxable portion represents more than half the value, the whole bundle is taxable. Others require businesses to allocate the price based on the fair market value of each component.
The “true object” test offers a way out in some situations. Tax authorities look at what the buyer was really after. If a customer hires a consultant who also delivers a printed report, the true object is the consulting service, not the paper. If the service is the true object and the physical product is incidental, the transaction follows the tax treatment of the service. The simplest way to avoid bundling problems is to separately state the price of each component on the invoice. When taxable and nontaxable items are individually listed, most states will only tax the taxable portions.
Local Jurisdictions Can Override the State Answer
State-level rules are only part of the picture. In home-rule states like Colorado, cities can establish their own sales tax rules that differ from the state’s. Colorado’s self-collecting home-rule cities have the authority to decide independently which goods and services are subject to their local tax. A service exempt at the state level might be taxable within city limits, and a business operating across multiple Colorado cities could face different rules in each one.
Alabama’s local jurisdictions similarly operate with significant independence on tax matters. Alaska’s situation is the most unusual: no state sales tax exists, but boroughs and cities have full authority to levy their own taxes, including on services. Smaller Alaska municipalities tend to favor sales taxes over property taxes because they lack the tax base to support property tax revenue alone.
Selling Services Into Another State
The 2018 Supreme Court decision in South Dakota v. Wayfair opened the door for states to require out-of-state service providers to collect and remit sales tax when they exceed certain economic thresholds. The most common threshold is $100,000 in sales or 200 transactions within a state during a 12-month period, though some states set higher bars. Alabama’s threshold is $250,000, and California’s is $500,000.
A detail that catches service businesses off guard: in many states, both taxable and nontaxable sales count toward the threshold. Vermont’s rules make this explicit, requiring businesses to count all sales of taxable and nontaxable items when determining whether they’ve crossed the line. A consulting firm whose services are exempt from Vermont sales tax might still be required to register there because its total sales volume triggers the nexus threshold. Registration and reporting obligations can apply even when no tax is ultimately owed.
Sourcing rules determine which state’s tax applies. Most states use destination-based sourcing, meaning the tax rate is based on where the buyer is located. About a dozen states, including Texas, Ohio, Pennsylvania, and California, use origin-based sourcing for in-state transactions, taxing based on the seller’s location instead. Interstate sales between states where the seller has nexus are generally destination-based regardless of the state’s usual approach.