Services subject to tax in the U.S.: a practical guide to which services are taxable

When a business sells services in the United States, it’s not enough to invoice—you must also know whether that service is subject to sales and use tax and in which jurisdictions. Unlike VAT systems, U.S. sales tax is determined at the state and local level, and rules vary (what’s taxable, rates, exemptions, and registration duties).
This guide explains which service categories are commonly taxable, which are often exempt, and how to evaluate your own case to stay compliant.

The basics: goods vs. services and why rules vary by state

Historically, many states taxed primarily tangible personal property (things you can see and touch). With the digital economy, more states have expanded taxation to services—from maintenance and storage to telecommunications, entertainment, or lodging.
The right question isn’t “Are services taxable?” but “Is this specific service taxable in this state/city for this customer and use?”

Service categories that are frequently taxable

The list below groups service families commonly subject to tax in multiple states. It is not exhaustive and can change by jurisdiction:

1) Maintenance, repair, and installation

• Maintenance, repair, and installation of tangible personal property (computers, machinery, appliances, equipment).
• Services on real property (certain repairs, minor improvements, maintenance) may be taxable depending on the state and whether they qualify as capital improvements.

2) Storage, parking, and occupancy

• Storage of tangible personal property.
• Parking and garages.
• Hotel occupancy and short-term lodging (often includes resort/amenity fees).

3) Telecommunications and utilities

• Wireline and wireless telephony, answering services, 800/900 lines, and certain information services.
• Utilities (electricity, gas, water) with state-specific rules and residential exemptions.

4) Entertainment and admissions

• Admissions to entertainment venues, cabarets, and events (the taxable base may include add-on charges).

5) Beauty, wellness, and facility use (jurisdiction-specific)

• In cities like New York, a range of personal services are taxable: barber/beauty, tanning, manicure/pedicure, massage, gyms/saunas, and weight-control centers.

6) Chauffeured transportation

• Transportation services with a driver (limousines, luxury vehicles, certain affiliated services). Treatment may differ for taxis, buses, or affiliated livery.

7) Digital and software services (high variability)

• Prewritten (non-custom) software—downloaded or accessed remotely (SaaS)—is taxable in many states.
• Custom software and development services may be exempt in some states when they qualify as professional services or when customization is substantial.

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Services that are often exempt (with caveats)

Many states exclude professional services (legal, accounting, consulting, many marketing services), education/training, medical and veterinary services, laundry/tailoring, and others.
Common exemptions also exist for resale, agricultural/industrial/manufacturing use, residential energy, or press.
Important: exemptions often require valid documentation (exemption certificates). Without a certificate, the seller must charge tax.

Special issues: e-commerce, marketplaces, and nexus

• Physical or economic nexus: you must collect sales tax in a state if you have presence (office, warehouse, personnel) or meet economic thresholds (e.g., $100,000 in sales or 200 transactions annually—state rules vary).
• Marketplaces: in many states, a marketplace facilitator is the collector of record for sales it processes; sellers must still verify compliance for direct sales (outside the marketplace), registrations, and filings.
• Sourcing: for services, states may use origin (where performed) or destination (where used/benefited). For digital services, many states apply destination sourcing.

How to decide if your service is taxable (operational checklist)

1. Identify the state and locality of the customer and where the benefit is received.
2. Classify the service (maintenance/installation, telecom, digital/SaaS, entertainment, personal, professional, etc.).
3. Check whether the service is listed as taxable in that state and whether exemptions apply (manufacturing, R&D, exempt entities, resale).
4. Confirm sourcing rules (origin vs. destination).
5. Assess nexus (physical/economic). If nexus exists, register to collect.
6. Obtain and retain valid exemption certificates (where applicable) within state deadlines.
7. Invoice correctly (show taxable base, rate, and tax; separate non-taxable charges).
8. File and remit per assigned frequency (monthly, quarterly, annually).
9. Monitor changes to laws and thresholds—states update frequently.

Practical sector examples

• Software agency: selling standard licenses or SaaS access is often taxable; custom development may be exempt in some states when it qualifies as a professional service.
• Equipment maintenance providers: generally taxable; if a maintenance contract includes parts, tax treatment may vary (fully taxable or apportioned).
• Lodging and events: hotel occupancy and admissions are commonly taxable, with additional local levies.
• Gyms and wellness: in certain cities, membership fees and facility use are taxable.
• Consulting and training: often exempt, unless the state taxes those services specifically or the package includes taxable software/licenses.

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Common pitfalls that create exposure

• Assuming services are never taxable.
• Failing to register despite meeting economic nexus thresholds.
• Not collecting exemption certificates on time (resale, exempt entities).
• Bundling taxable and exempt items into a single, undifferentiated charge.
• Ignoring local add-on taxes (county/city) or special district rates.

Frequently asked questions

Do all states tax services?
No. Some tax few services; others tax many. Local taxes can expand the scope.

If I sell SaaS to out-of-state customers, do I collect tax?
It depends on nexus in the customer’s state and whether SaaS is taxable there. Check economic nexus thresholds and destination sourcing rules.

Are professional services (legal, accounting, consulting) taxable?
In many states they’re exempt, but there are exceptions (bundled deliverables, embedded software/licenses). Always verify by jurisdiction.

How do I prove a sale is exempt?
With valid exemption certificates (resale, exempt organization, manufacturing use, etc.), obtained and retained within state-specific timelines.

Your next step: correct setup and ongoing compliance

Determining which services are taxable in each state requires method and documentation. At Openbiz, we help you:

• Form your U.S. company and secure required tax registrations.
• Map your services against state and local rules to determine taxability.
• Register, invoice, file, and remit sales tax correctly—including direct sales and marketplace transactions.

Let’s talk so your U.S. operation stays compliant and you can grow with administrative and fiscal confidence.

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