Why this matters for service providers
State sales tax on services can change a service provider’s pricing, cash flow, and compliance workload. Unlike sales tax on tangible goods — which most states historically taxed — many states now tax a range of services, and the rules differ widely. Failing to collect or remit sales tax where required can lead to back taxes, interest, and penalties (including assessments for uncollected tax). In my practice as a CFP® advising small businesses, missed sales-tax obligations are a common source of surprise liabilities.
How states decide which services are taxable
States write their own sales-and-use tax laws. Some apply tax broadly to “tangible personal property” and list taxable services explicitly; others push to tax services by statute or regulation. Key patterns you’ll see:
- Some states tax only a narrow set of services (e.g., hotel, telecommunications, repair). Others have broader lists that can include professional, personal, or information services.
- Local governments can add local sales taxes on top of the state rate; combined rates vary by jurisdiction.
- Digital and electronically delivered services are increasingly taxable in many states.
Authoritative overview resources: National Conference of State Legislatures (NCSL) maintains state-by-state guides to services that are taxable, and state Department of Revenue sites publish specific lists and examples (e.g., New Jersey, Florida, New York) (NCSL; NJ Division of Taxation; Florida Dept. of Revenue; NY Tax Dept.).
Nexus: when a state can require you to collect tax
Two forms of nexus matter for services:
- Physical nexus: you have employees, inventory, an office, or contractors in the state.
- Economic nexus: after South Dakota v. Wayfair (U.S. Supreme Court, 2018), states can require remote sellers to collect sales tax if sales into the state exceed thresholds (often $100,000 in sales or 200 transactions, though thresholds vary by state).
If your business meets a state’s nexus rules, you must register for a sales tax permit, collect tax on taxable services, file returns, and remit the tax. Check the revenue department for each state where you sell. For guidance on registration across states, see our internal resource “Multi-State Sales Tax Registration: When You Need to Register.” (https://finhelp.io/glossary/multi-state-sales-tax-registration-when-you-need-to-register/)
Which services are commonly taxable (and which are commonly exempt)
There’s no one-size-fits-all list, but typical examples:
Commonly taxable services
- Repair, installation and maintenance services
- Personal services (e.g., hair salons in some states)
- Lodging, admission/entertainment tickets, and certain professional services in some states
- Telecommunications and utility-like services
Commonly exempt services
- Most professional services (legal, accounting) are exempt in many states
- Medical and health-related services are often exempt
- Educational services and certain nonprofit activities
Because state lists differ, always confirm whether a service you provide is taxable in that particular state.
Bundled sales, mixed transactions, and allocation
When a sale combines taxable goods and non-taxable services, states handle “bundled” or “mixed” transactions differently:
- Some states require tax on the whole invoice if taxable and non-taxable items are not separately stated.
- Other states demand allocation and tax only the taxable portion if charges are itemized clearly.
Best practice: separately state labor and materials on invoices and maintain supporting documentation to show how charges were allocated.
Marketplace facilitators and third-party platforms
Many states now require marketplace facilitators (e.g., platforms that host sellers or service providers) to collect and remit sales tax on behalf of sellers. If you sell through a platform, confirm whether the platform or you are responsible for collection. This rule significantly reduces compliance burdens for individual sellers but does not eliminate registration requirements in all cases.
Practical steps for service providers: a compliance checklist
- Identify taxable services in each state where you have customers. Use state Department of Revenue resources and NCSL summaries.
- Determine nexus (physical and economic) in each state. Monitor sales thresholds and transaction counts.
- Register for a sales tax permit in each state where required. (See our guide to multi-state registration.) (https://finhelp.io/glossary/multi-state-sales-tax-registration-when-you-need-to-register/)
- Decide how you’ll collect tax (invoicing, point-of-sale systems, online checkout). Update invoices to show tax separately when possible.
- Track exempt customers and collect valid exemption certificates (use state-approved certificate forms).
- File returns and remit collected tax by the due date for each state. Set calendar reminders — filing frequencies vary (monthly, quarterly, annual).
- Maintain records for at least 3–6 years (many states require 4–6 years). Keep copies of returns, exemption certificates, invoices, and nexus analyses.
- Consider sales-tax automation software or a reliable accounting system that supports multi-jurisdiction tax rates.
Pricing and cash-flow considerations
If a previously non-taxable service becomes taxable, decide whether to absorb the tax or add it to customer prices. Small providers sometimes under-collect while learning new rules; that creates future liability for the business. Be transparent with customers and update contracts or price lists when tax applicability changes.
Penalties, audits, and common errors
Penalties for noncompliance include back taxes, interest, and civil penalties. Common mistakes:
- Assuming all services are either taxable or untaxable across all states.
- Not separating charges on bundled invoices.
- Missing marketplace-facilitator rules.
- Not tracking economic nexus thresholds for remote sales.
If audited, provide invoices, exemption certificates, and nexus documentation. In my experience advising clients during audits, thorough, organized records greatly reduce assessment amounts and speed resolution.
Tools and when to get professional help
- Sales-tax automation: tools like Avalara, TaxJar, or built-in features in QuickBooks can help calculate and file multi-state sales tax accurately.
- When to hire a CPA or sales-tax specialist: if you operate in multiple states, have complex bundled transactions, handle many exempt customers, or face an audit.
Examples and short case studies
1) Freelance graphic designer: Many states don’t tax standalone creative services, but if the designer sells printed products or bundles design with goods, taxability can change. Separating goods and services on the invoice is critical.
2) Home contractor: Labor might be taxable or exempt depending on whether it’s repair vs. capital improvement and how the state defines construction services.
3) Salon owner in Florida: Florida taxes certain personal services; a salon must collect tax on taxable services and remit accordingly. Confirm specific rules with the state’s revenue office (Florida Dept. of Revenue).
Frequently Asked Questions
Q: How do I know if digital services I sell are taxable?
A: States vary—check the state revenue department and NCSL summaries. See our article on digital goods for more detail: “State Sales Tax on Digital Goods: What You Need to Know.” (https://finhelp.io/glossary/state-sales-tax-on-digital-goods-what-you-need-to-know/)
Q: I sell across state lines online—do I need to register in every state?
A: You must register where you have nexus. Economic nexus rules created after Wayfair mean remote sellers may need to register once thresholds are exceeded. Our guide “How do states handle sales tax on online purchases?” explains buyer- vs. seller-responsibility models. (https://finhelp.io/glossary/how-do-states-handle-sales-tax-on-online-purchases/)
Q: What records should I keep?
A: Sales records, invoices, exemption certificates, nexus analyses, returns, and correspondence with state tax authorities. Keep at least 3–6 years, or longer if a state specifies.
Resources and authoritative references
- U.S. Supreme Court — South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) — established economic nexus authority for states.
- National Conference of State Legislatures (NCSL), Sales Tax on Services (state-by-state summaries): https://www.ncsl.org/research/fiscal-policy/sales-tax-on-services.aspx
- IRS — Sales and Use Tax overview (note: state-level tax administration is by states): https://www.irs.gov/businesses/small-businesses-self-employed/sales-and-use-tax
- New Jersey Division of Taxation: https://www.state.nj.us/treasury/taxation/index.shtml
- Florida Department of Revenue: https://floridarevenue.com/
- New York State Department of Taxation and Finance: https://www.tax.ny.gov/
Internal FinHelp articles for further reading:
- Multi-State Sales Tax Registration: When You Need to Register (https://finhelp.io/glossary/multi-state-sales-tax-registration-when-you-need-to-register/)
- A guide to state sales tax (https://finhelp.io/glossary/a-guide-to-state-sales-tax/)
- State Sales Tax on Digital Goods: What You Need to Know (https://finhelp.io/glossary/state-sales-tax-on-digital-goods-what-you-need-to-know/)
Professional disclaimer
This article is educational and does not constitute individual tax, legal, or accounting advice. State tax rules change frequently. Consult a qualified CPA, tax attorney, or your state Department of Revenue for guidance specific to your business.
— Author note: As a CFP® who has worked with dozens of service-based businesses, I recommend documenting your decisions, using automation for multi-state collection, and getting targeted professional help when thresholds or audits become complex.