In the US, most physical goods are taxable, with a few exceptions, such as food and medical items. In addition, many US states also consider digital goods and other SaaS offerings to be taxable. Until recently, the majority of states did not require businesses to charge sales tax on services. However, with states looking to generate more tax revenue, this has changed.

In this article, we'll focus on service taxability, including defining what a service is and when businesses operating in the US should charge sales tax on services.

What's in this article?

• What constitutes a service?
  
• When to charge sales tax on services in the US
  
• How to collect sales tax on services in the US
  

What constitutes a service?

We all know what a service is, but it's important to define what is considered to be a service for sales-tax purposes in the US. While the term "services" covers a wide range of activities, they are generally organised into four categories:

• Business services: These include common business services, such as computer services, financial services, advertising services and consulting services.
  
• Personal services: These include a variety of services, such as salon and spa services, childcare, pet care and education services.
  
• Professional services: Not to be confused with business services, these include services performed by accountants, architects, engineers, lawyers and medical professionals.
  
• Property services: These include services that are applied to physical goods, such as installation or repair services, as well as property services, such as cleaning, landscaping, painting, pest control and construction services.
  

When to charge sales tax on services in the US

Not all US states require businesses to charge sales tax on services. Here's a brief breakdown of state service taxability:

• There are five US states (Alaska, Delaware, Montana, New Hampshire and Oregon) that do not have a state-wide sales tax, meaning that services are not taxable in those states.
  
• Four US states (Hawaii, South Dakota, New Mexico and West Virginia) tax services by default, with exemptions listed for certain services.
  
• The remaining US states do not tax services by default, but tax certain services as listed in state sales tax law.
  

We recommend that businesses contact the state tax authority or a sales tax expert for guidance.

How to collect sales tax on services in the US

Before collecting any sales tax from customers, businesses should ensure that they are properly registered with the relevant US state tax authorities. In the US, businesses must register for sales tax permits with each individual state in which they have physical or economic nexus.

Once businesses have collected sales tax from their customers, they will file a tax return and remit the tax that they have collected to the correct state. Each state's tax authority website will have details on how to file, as well as the due date. Due dates vary, and the frequency with which businesses must file a return may also vary. In general, large companies with a higher tax liability will often file more frequently (monthly), and smaller companies may only be required to file bi-monthly or quarterly returns.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, value-added tax (VAT), and goods and services tax (GST) on:

• Digital goods and services in all US states and over 100 countries

• Physical goods in all US states and 42 countries

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You’ll benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.