Sales tax on services: the questions that decide whether you charge it

Owners ask "do I charge sales tax?" as if there were one answer. There are fifty or so, plus local ones. The SBA puts it plainly: tax laws vary by location and business structure, and you need to check with state and local governments to know your obligations.

So this guide will not tell you whether your state taxes your work. It explains the concepts every state's rules are built from, so you can ask your state the right questions and understand the answer. For your state's agency and our sourced summary, open our state guides. This is general information, not tax or legal advice; for anything that affects how you bill, confirm with your state revenue department or an accountant who works in your state.

Why are services taxed differently from products?

Sales taxes grew up around the sale of physical goods. States then added services over time, each by its own statute, usually by naming specific services or categories of service. The result is uneven. Some states tax a long list of services, some tax very few, and some states have no general sales tax at all. Two businesses doing the same work on either side of a state line can have opposite answers.

That is why the first question is never "are services taxable?" It is "is this service, as I deliver it, taxable in this state?"

What questions decide whether you charge it?

Take these to your state's revenue department website, its published guidance for your industry, or your accountant:

1. Does my state name my service as taxable? Look for the statute or the agency's guidance for your trade. Lawn care, cleaning, pest control, repair, installation and maintenance are often treated as separate categories, so read the wording for each kind of work you do.
2. Is the job an improvement to real property, a repair, or a service to tangible personal property? Many states draw lines between building or improving real estate (a new roof, a fence, a patio), repairing it, and servicing things that are not real estate (a lawn mower, an appliance, a vehicle). Each can carry a different rule.
3. Who is the consumer of the materials? Some states treat a contractor who installs materials into real property as the final consumer of those materials, so the tax is paid at the supply house and none is added to the customer's bill. Others treat the contractor as reselling the materials to the customer. The answer changes what you pay at the supply house and what you put on the invoice.
4. Does it matter how I itemize? In some systems, separately stated materials and labor are taxed differently, and a lump-sum price can change the result. Ask before you redesign your invoice.
5. Where is the sale taxed? For on-site work, the job address usually matters, and local rates can apply on top of the state rate. Ask how your state sources service sales.
6. Do I need a permit or license to collect, and how often do I file? Registration is generally required before you collect a single dollar of tax. Filing frequency often depends on volume.
7. Which customers are exempt? Governments, schools, nonprofits and resellers may give you an exemption or resale certificate. Ask what form your state accepts and keep a copy for every exempt sale.

A worked example: same job, different rules (hypothetical)

Imagine a $2,000 job made up of $1,400 of labor and $600 of materials, in a made-up state with a 5% sales tax rate. The rate and both rules below are invented to show how the treatment changes the invoice; they are not any real state's law.

Under Rule A, the $30 is your cost and belongs in the price. Our job price calculator lets you include it with materials. Under Rules B and C, the tax passes through to the customer, and charging it wrong in either direction is a problem: undercharge and you may owe the difference yourself; overcharge and you have collected money that is not yours.

What is use tax, and why does it catch contractors?

Use tax is the companion to sales tax in states that have one. Broadly, it applies when you use taxable items in the state without having paid sales tax on them: materials bought tax-free from an out-of-state seller, items bought on a resale certificate and then used yourself instead of resold, equipment bought online. The rate generally mirrors the sales tax rate, and you report it to the state yourself.

Contractors run into it in two common ways. One is buying materials on a resale certificate in a state that treats the contractor as the consumer, which can mean tax was owed at purchase. The other is ordering tools and supplies online from sellers that did not charge tax. Ask your state how to report use tax, and ask your accountant to look at it during your year-end review.

How should you handle tax you collect?

• Register first. Get your state's sales tax permit or license before charging tax. Charging tax without one causes its own problems.
• Treat it as the state's money. Record collected tax in a liability account, not revenue, and consider moving it to a separate savings account each week. Spending it and scrambling at filing time is a common, avoidable mistake.
• File on time even with nothing due. Ask whether your state expects a return for every period once you are registered, including periods with no tax due, and assume it does until told otherwise.
• Keep the paperwork. Exemption and resale certificates, invoices showing how tax was calculated, and your filed returns. Our bookkeeping guide covers how long to keep records for federal purposes; your state may have its own rules.

How do you set up invoices and software?

Once you have your state's answer, make the software enforce it so the crew and office never have to think about it on the spot.

• Tax by line item. If labor and materials are treated differently, each line on a quote and invoice needs its own taxable flag.
• Tax by job address. If local rates apply, the rate should come from the service address, not the billing address or your shop.
• Exempt customers flagged once. Store the certificate on the customer record so every future invoice is right.
• A report that matches the return. At filing time you want taxable sales, exempt sales and tax collected by period and, if needed, by jurisdiction, without exporting to a spreadsheet.

Off-the-shelf field software handles much of this. If your mix of services, locations and exemptions does not fit its settings, a custom CRM can apply your state's rules line by line from the job record. Either way, write down the rules your state gave you and the date, and recheck them each year, because states change service taxes by legislation.

What if you work in more than one state?

Each state where you work is its own question. Doing a job in a neighboring state can create obligations there, including registration, sales or use tax on materials, and sometimes income tax filings. The SBA's licensing guidance makes the same point for permits: requirements depend on your activities and location, and you have to research each state, county and city. Before taking cross-border work, check both states' pages, starting from our list of states, and talk to an accountant who handles multistate businesses.

If you are expanding into a new area and want to know how customers there would find you, a free system quote covers your current search presence and lead sources.

Frequently asked questions