Sales Tax on Services: Which States Tax Service Businesses and How to Comply
Sales tax has traditionally applied to the sale of tangible personal property (physical goods). Most states exempt services from sales tax. However, a growing number of states tax specific categories of services, and some states (Hawaii, New Mexico, South Dakota, West Virginia) tax nearly all services. Service businesses must check their specific state’s rules to determine whether their services are taxable.
States that broadly tax services (most services taxable):
- Hawaii (General Excise Tax, 4-4.5%, applies to nearly all services)
- New Mexico (Gross Receipts Tax, applies to most services)
- South Dakota (sales tax applies to most services)
- West Virginia (sales tax applies to most services)
States that tax specific service categories (examples):
- IT services: Taxable in Connecticut, DC, Iowa, New York, Ohio, Pennsylvania, Texas, and others
- Landscaping/lawn care: Taxable in Connecticut, Florida, Iowa, Minnesota, Nebraska, and others
- Cleaning/janitorial: Taxable in more than 20 states
- Construction labor: Varies widely (some states tax the labor component, others exempt it)
- Professional services (accounting, legal, consulting): Taxable in very few states (Hawaii, New Mexico, South Dakota, West Virginia, and partially in a few others)
- Personal care (hair, nails, massage): Taxable in Iowa, Minnesota, New Mexico, and a few others
States with NO sales tax (no services are taxed):
- Alaska (no state sales tax, but some local jurisdictions impose one)
- Delaware
- Montana
- New Hampshire
- Oregon
How does a service business determine its obligation?
The service business must answer three questions:
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For current guidance, see Streamlined Sales Tax governing board. Is the specific service taxable in my state? Check the state’s department of revenue website or publication listing taxable services. The classification can be narrow: “data processing services” may be taxable while “custom software development” is exempt, even though both involve programming.
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Do I have nexus in other states where my services are taxable? After the Wayfair decision, many states have adopted economic nexus thresholds for sales tax (typically $100,000 in sales or 200 transactions). A cleaning company in Florida (where cleaning is taxable) with $120,000 in Florida revenue has Florida sales tax nexus.
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How do I collect and remit the tax? Register for a sales tax permit in each state where the service is taxable and the business has nexus. Charge the correct rate on invoices. File returns (monthly, quarterly, or annually depending on volume) and remit the collected tax.
What about SaaS and digital products?
Software-as-a-Service (SaaS) is the fastest-growing area of sales tax complexity. States are split on whether SaaS is taxable:
- Taxable: Connecticut, DC, Iowa, Massachusetts, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Washington, and others
- Exempt: California, Colorado, Florida, Georgia, Illinois, Indiana, Missouri, Virginia, and others
The classification is changing rapidly as states update their rules. A SaaS business serving customers nationwide should use sales tax automation software (Avalara, TaxJar) to track which states require collection and handle the filings.
How do I determine if I have sales tax nexus in another state?
After the 2018 Wayfair decision, most states impose economic nexus based on sales volume or transaction count, regardless of physical presence. Common thresholds are $100,000 in sales or 200 transactions in a state within a calendar year, though these vary by state. Physical nexus still applies too: having employees, inventory, a warehouse, or attending trade shows in a state can create nexus. Marketplace facilitators (Amazon, Etsy, Shopify) collect and remit sales tax on your behalf in most states, which may reduce your direct filing obligations. Once you have nexus, you must register, collect tax on taxable sales, and file returns at the required frequency (monthly, quarterly, or annually).
How do I know if I have sales tax nexus in a state?
Physical nexus exists if you have employees, inventory, property, or regular presence in a state. Since the 2018 South Dakota v. Wayfair decision, most states also impose economic nexus based on revenue or transaction thresholds, typically $100,000 in sales or 200 transactions in the state during the current or prior year. Each state sets its own thresholds, and some have eliminated the transaction count test entirely. Marketplace facilitators (Amazon, Etsy, eBay) collect and remit sales tax on your behalf for sales through their platform in most states, but direct sales through your own website still require you to collect and remit. Once you establish nexus, you must register for a sales tax permit, begin collecting tax, and file returns on the state’s schedule (monthly, quarterly, or annually, usually based on volume).
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Yarik Yarosh, CPA. "Sales Tax on Services: Which States Tax Service Businesses and How to Comply." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-sales-tax-service-businesses
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.