In the US, most physical goods are taxable, with a few exceptions such as groceries and medical items. Many states also consider digital goods and other software-as-a-service (SaaS) offerings to be taxable. Until recently, the majority of states didn’t require businesses to charge sales tax on services. However, as service-based and digital economies have grown, more states have expanded their tax bases to include services as a means of generating more tax revenue.

Below, we’ll explore service taxability, including what a service is and when to 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
  
• How Stripe Tax can help
  

What constitutes a service?

While the term “services” covers a wide range of activities, services are generally organized into four categories:

• Business services: Common B2B services such as information technology, finances, advertising, and consulting 

• Personal services: Services such as salon and spa services, childcare, pet care, and education

• Professional services: Services performed by accountants, architects, engineers, attorneys, and medical professionals—not to be confused with business services

• Property services: Services applied to physical goods (e.g., installation, repair), as well as services to real property (e.g., cleaning, landscaping, painting, pest control, construction services) 

Many transactions don't fall neatly into a single category, however. When a sale bundles both a good and a service together (e.g., software paired with implementation support, furniture sold with delivery and assembly), it's not always clear whether the transaction should be taxed as a good or a service.

To address this issue, states apply what's known as the “true object test,” which asks what the customer is actually paying for. If the transaction’s primary purpose is the good, with the service being incidental to it, the whole sale is generally taxed as a good (and vice versa). States can differ in how they apply this test.

What to do if you're unsure whether your service is taxable

If you're not sure whether sales tax applies to your service, work through these steps:

• Identify the states where you have nexus: Sales tax obligations apply only in states where your business has established nexus so start by narrowing your scope to those states.

• Determine which service category applies to your offering: Figure out whether your service falls under business, personal, professional, or property services.

• Check the state tax authority's guidance for that specific service type: Taxability varies by state and by service category so consult each relevant state's department of revenue or equivalent agency for specifics.

• Apply the true object test if goods are involved: If your service includes a good, use the true object test to determine whether the transaction should be classified—and taxed—as a good or a service.

• Consult a tax professional if state guidance is unclear: When the rules aren't clear-cut, a tax adviser familiar with your industry and states of operation can help you avoid costly missteps.

When to charge sales tax on services in the US

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

• There are five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) that don’t have a statewide sales tax so services aren’t taxable in those states.

• Four states (Hawaii, New Mexico, South Dakota, and West Virginia) tax services by default, with exemptions listed for certain services.

• The remaining states don’t tax services by default but tax certain services listed in their sales tax laws.

Before you decide whether to charge sales tax on a service, you should confirm whether your business has nexus in a state. Without nexus, you generally have no obligation to collect sales tax in that state, even if the service is taxable there.

We recommend contacting the state tax authority or a sales tax expert for guidance for your business.

SaaS and digital service taxability

SaaS and other digital services are a complex area of service taxability since there's no federal standard and states classify these offerings differently. Some states treat SaaS as a taxable digital service or tangible personal property, while others exempt it as an intangible service. And several apply different rules depending on whether the sale is B2B or B2C. States that generally tax SaaS include:

• Arizona

• Connecticut

• Hawaii

• Massachusetts

• New Mexico

• New York

• Ohio

• Pennsylvania

• Rhode Island

• South Dakota

• Texas

• Utah

• Washington

• West Virginia

Because these rules shift frequently and can vary even at the local level, it's worth confirming current treatment with each state's tax authority before you assume how your product will be classified.

How to collect sales tax on services in the US

Before you collect any sales tax from your customers, conduct a nexus study. This is an analysis of where your business activities and sales create tax obligations. After you’ve conducted the study and determined where you need to pay taxes, ensure you’re appropriately registered with the tax authorities in those states. In the US, businesses must register for sales tax permits with each individual state in which they have physical or economic nexus.

Once you collect sales tax from your customers, you’ll file a tax return and remit the tax you collected to the correct state. Each state’s tax authority will post details online on how to file and your due date. Due dates vary and the frequency with which you file a return might also differ across states. In general, large companies with higher tax liabilities will file more frequently (monthly), and smaller companies might be required to file only bimonthly or quarterly returns. Automating taxes where possible helps make the process easier for your business.

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.