When do I need to charge sales tax for my services

This post has been updated. It was originally published in August 2022.

Iowa taxes janitorial services for nonresidential buildings. Ohio taxes janitorial services if annual sales equal or exceed $5,000. And in Kansas, sales tax applies to charges to wax and polish floors but not for most other janitorial services.

These are just a few of the reasons why it's hard to answer the question, Do I need to charge sales tax for services?

Can sales tax be charged on services? Absolutely. Do you need to charge tax on the services you sell? Maybe, but maybe not. Whether you're required to charge tax on services depends on several factors, including the type of service sold, where the service is performed, and who is receiving the service.

To help you determine when you must collect sales tax on the services you offer, here's an overview of how states tax services.

Which services are subject to sales tax?

There are six broad categories of services that can be subject to sales tax:

• Services performed on tangible personal property (TPP), such as repairs to an appliance or car

• Services performed on real property (buildings or land), including janitorial and landscape services

• Personal services like body piercing, haircuts, personal training, or tattooing

• Amusement and recreation, such as admission to amusement parks, concerts, live theater, or professional sports events

• Business services like after-hours telephone answering or credit reporting

• Professional services, such as accounting, legal work, medical care, and other services provided by specialists accredited in their fields

It's helpful to understand how the services you provide are categorized in the states where you do business, and the states' general treatment of them. More states tax services to TPP than services to real property; taxing business services is more common than taxing professional services.

All things considered, it's good to take the above list with a grain of salt. While about 37 states tax services on tangible personal property, for example, most of those states don't tax all services on tangible personal property. There are few absolutes when it comes to sales tax.

Which states tax the most services?

Hawaii, New Mexico, South Dakota, and West Virginia tax all services by default. However, each of these states exempts select services or taxpayers. For example:

• West Virginia exempts day care services as well as the construction, alteration, repair, improvement, or decoration of real property - provided the work performed "results in a 'capital improvement' to the real property."

• South Dakota exempts agricultural services, educational services, health services, and social services.

Hawaii levies a general excise tax (GET) on businesses rather than a sales tax on customers, and few sales are exempt from the GET. That said, according to the Hawaii Department of Taxation, Hawaii does have close to 60 different exemptions from the GET.

New Mexico has a gross receipts tax instead of a sales tax; as in Hawaii, few services are exempt in the Land of Enchantment. However, receipts from charges to feed, handle, or train livestock are exempt from New Mexico gross receipts tax.

Which states tax very few services?

California, Colorado, Georgia, and Michigan tend to tax very few services.

Some labor services may be subject to California sales tax if they're involved in the creation or manufacturing of new tangible personal property. For instance, the alteration of a new garment is taxable, but the alteration of used clothing is exempt.

So if you buy a new suit and take it to a tailor, then the tailor must charge California sales tax. But if you wear the suit then decide the jacket needs to be taken in or the sleeves let out, then the tailor wouldn't charge sales tax on their labor, because that's considered an exempt repair or restoration service.

Colorado generally taxes services sold with taxable tangible personal property (aka, bundled). The state's services tax also applies to accommodations as well as to telephone and certain utility services.

While most services are exempt from Georgia sales tax, Georgia taxes the sale of accommodations, in-state transportation of individuals (meaning limos or taxis), sales of admissions, and charges to participate in games and amusement activities. If a service is needed to complete the sale of taxable personal property - like a delivery charge - it would also be taxable.

In Michigan, delivery and installation services are subject to sales tax only if the seller fails to separately state the charges on the customer invoice or fails to keep records showing how the tax was calculated.

Which states don't charge sales tax on services?

Five states do not have a general sales tax: New Hampshire, Oregon, Montana, Alaska and Delaware (sometimes called the NOMAD states because of their initials). There's no state sales tax on services in those states, but other taxes, such as the Delaware gross receipts tax, may apply.

There are also local sales taxes in certain resort districts in Montana and in about 100 jurisdictions in Alaska. Taxability rules for these local taxes vary by location.

Interestingly, Alaska mandates a handful of statewide exemptions to local sales tax on services. For example, "a borough may not levy or collect a sales tax" on "the provision of services relating to an orbital space facility, space propulsion system, or space vehicle, satellite, or station of any kind possessing space flight capacity, including the components of them."

It's a best practice to check with state or local tax authorities or a trusted third party to determine whether the service you provide is subject to tax. Unless you're literally a rocket scientist working in Alaska.

More states are extending sales tax to services

Sales tax is an essential source of revenue for 45 states, Puerto Rico, and the District of Columbia. Yet the sales tax base is shrinking because Americans now buy more services than things, and most services are sales tax exempt in most states.

Over the past decade, a number of states have extended sales tax to enumerated services. North Carolina began taxing some installation, maintenance, and repair services in 2016 and more of those services in 2017. Kentucky started taxing dozens of services in 2018.

More states are likely to tax more services in the coming years. If the services you provide are exempt from sales tax today, they may be subject to sales tax tomorrow.

For more information about when and where you need to charge sales tax for services, check out our state-by-state guide to charging sales tax on services. It's chock-full of helpful information.