Sales tax on services

There is no federal sales tax in the United States. Every rule that decides whether your work is taxable is a state rule, and the states disagree — which is why no article can tell you the answer and why the useful thing is knowing which question to ask.

The three questions that decide it

  1. Which state's rules apply?

    Usually the state where the service is delivered or the benefit is received, not where you happen to be sitting. For remote work this is the question that most often has a surprising answer.

  2. Is this service taxable there?

    Some states tax services broadly, some tax a named list and nothing else, and some tax almost none. Being on the list is what matters, not whether the work feels like a product.

  3. Does anything you supply with it change the answer?

    A service that includes tangible goods, or software, or a licence, is frequently treated differently from the same service supplied alone.

Nexus decides whether you must register

Even where a service is taxable, you only have to collect if you have nexus in that state — a connection created by physical presence or by economic activity above the state's own thresholds. Both the thresholds and what counts as nexus are set state by state and are revised regularly.

Showing it on the invoice

  • A separate tax line, never folded into the unit prices
  • The rate applied, and the amount it was applied to
  • Your registration or permit number where the state expects it shown
  • A note against any line that is exempt, and why

An invoice where tax cannot be recomputed from the lines above it is one an auditor will ask about, and one your customer's own accounts payable may hold.

Make an invoice with tax lines

Common questions

Are consulting services taxable?
In most states, no; in several, yes; and in a few it depends on what the consulting produces. It is a state-by-state question, and the answer for your state is the only one that matters.
Do I charge tax to an out-of-state client?
Only if you have nexus in their state and the service is taxable there. Both halves have to be true.
What if my client is tax exempt?
Collect and keep their exemption certificate before you invoice without tax. Without the certificate on file, the exemption is something you asserted rather than something you can evidence.

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